Weentered2008with$44.3billionofcash-equivalents,andwehavesinceretainedoperatingearnings of$17billion.Nevertheless,atyearend2009,ourcashwasdownto$30.6billion(with$8billionearmarkedfor theBNSFacquisition).We’veputalotofmoneytoworkduringthechaosofthelasttwoyears.It’sbeenan idealperiodforinvestors:Aclimateoffearistheirbestfriend.Thosewhoinvestonlywhencommentatorsare upbeatenduppayingaheavypriceformeaninglessreassurance.Intheend,whatcountsininvestingiswhatyou payforabusiness–throughthepurchaseofasmallpieceofitinthestockmarket–andwhatthatbusinessearns inthesucceedingdecadeortwo. ************ LastyearIwroteextensivelyaboutourderivativescontracts,whichwerethenthesubjectofboth controversyandmisunderstanding.Forthatdiscussion,pleasegotowww.berkshirehathaway.com. Wehavesincechangedonlyafewofourpositions.Somecreditcontractshaverunoff.Thetermsof about10%ofourequityputcontractshavealsochanged:Maturitieshavebeenshortenedandstrikeprices materiallyreduced.Inthesemodifications,nomoneychangedhands. Afewpointsfromlastyear’sdiscussionareworthrepeating: (1)Thoughit’snosurething,Iexpectourcontractsinaggregatetodeliverusaprofitovertheirlifetime, evenwheninvestmentincomeonthehugeamountoffloattheyprovideusisexcludedinthe calculation.Ourderivativesfloat–whichisnotincludedinthe$62billionofinsurancefloatI describedearlier–wasabout$6.3billionatyearend. (2)Onlyahandfulofourcontractsrequireustopostcollateralunderanycircumstances.Atlastyear’slow pointinthestockandcreditmarkets,ourpostingrequirementwas$1.7billion,asmallfractionofthe derivatives-relatedfloatweheld.Whenwedopostcollateral,letmeadd,thesecuritiesweputup continuetoearnmoneyforouraccount. (3)Finally,youshouldexpectlargeswingsinthecarryingvalueofthesecontracts,itemsthatcanaffect ourreportedquarterlyearningsinahugewaybutthatdonotaffectourcashorinvestmentholdings. Thatthoughtcertainlyfit2009’scircumstances.Herearethepre-taxquarterlygainsandlossesfrom derivativesvaluationsthatwerepartofourreportedearningslastyear: Quarter $Gain(Loss)inBillions 1(1.517) 22.357 31.732 41.052 Aswe’veexplained,thesewildswingsneithercheernorbotherCharlieandme.Whenwereportto you,wewillcontinuetoseparateoutthesefigures(aswedorealizedinvestmentgainsandlosses)sothatyoucan moreclearlyviewtheearningsofouroperatingbusinesses.Wearedelightedthatweholdthederivatives contractsthatwedo.Todatewehavesignificantlyprofitedfromthefloattheyprovide.Weexpectalsotoearn furtherinvestmentincomeoverthelifeofourcontracts. 15WehavelonginvestedinderivativescontractsthatCharlieandIthinkaremispriced,justaswetryto investinmispricedstocksandbonds.Indeed,wefirstreportedtoyouthatweheldsuchcontractsinearly1998. Thedangersthatderivativesposeforbothparticipantsandsociety–dangersofwhichwe’velongwarned,and thatcanbedynamite–arisewhenthesecontractsleadtoleverageand/orcounterpartyriskthatisextreme.At Berkshirenothinglikethathasoccurred–norwillit. It’smyjobtokeepBerkshirefarawayfromsuchproblems.CharlieandIbelievethataCEOmustnot delegateriskcontrol.It’ssimplytooimportant.AtBerkshire,Ibothinitiateandmonitor every derivatives contractonourbooks,withtheexceptionofoperations-relatedcontractsatafewofoursubsidiaries,suchas MidAmerican,andtheminorrunoffcontractsatGeneralRe.IfBerkshireevergetsintrouble,itwillbe my fault. ItwillnotbebecauseofmisjudgmentsmadebyaRiskCommitteeorChiefRiskOfficer. ************ Inmyviewaboardofdirectorsofahugefinancialinstitutionis derelict ifitdoesnotinsistthatits CEObearfullresponsibilityforriskcontrol.Ifhe’sincapableofhandlingthatjob,heshouldlookforother employment.Andifhefailsatit–withthegovernmentthereuponrequiredtostepinwithfundsorguarantees– thefinancialconsequencesforhimandhisboardshouldbesevere. Ithasnotbeenshareholderswhohavebotchedtheoperationsofsomeofourcountry’slargestfinancial institutions.Yettheyhavebornetheburden,with90%ormoreofthevalueoftheirholdingswipedoutinmost casesoffailure.Collectively,theyhavelostmorethan$500billioninjustthefourlargestfinancialfiascosofthe lasttwoyears.Tosaythese owners havebeen“bailed-out”istomakeamockeryoftheterm. TheCEOsanddirectorsofthefailedcompanies,however,havelargelygoneunscathed.Theirfortunesmay havebeendiminishedbythedisasterstheyoversaw,buttheystillliveingrandstyle.Itisthebehaviorofthese CEOsanddirectorsthatneedstobechanged:Iftheirinstitutionsandthecountryareharmedbytheir recklessness,theyshouldpayaheavyprice–onenotreimbursablebythecompaniesthey’vedamagednorby insurance.CEOsand,inmanycases,directorshavelongbenefittedfromoversizedfinancialcarrots;some meaningful sticksnowneedtobepartoftheiremploymentpictureaswell. AnInconvenientTruth(BoardroomOverheating) Oursubsidiariesmadeafewsmall“bolt-on”acquisitionslastyearforcash,butourblockbusterdeal withBNSFrequiredustoissueabout95,000Berkshiresharesthatamountedto6.1%ofthosepreviously outstanding.CharlieandIenjoyissuingBerkshirestockaboutasmuchaswerelishpreppingforacolonoscopy. Thereasonforourdistasteissimple.Ifwewouldn’tdreamofsellingBerkshireinitsentiretyatthe currentmarketprice,whyintheworldshouldwe“sell”asignificantpartofthecompanyatthatsameinadequate pricebyissuingourstockinamerger? Inevaluatingastock-for-stockoffer,shareholdersofthetargetcompanyquiteunderstandablyfocuson themarketpriceoftheacquirer’ssharesthataretobegiventhem.Buttheyalsoexpectthetransactiontodeliver themthe intrinsic valueoftheirownshares–theonestheyaregivingup.Ifsharesofaprospectiveacquirerare sellingbelowtheirintrinsicvalue,it’simpossibleforthatbuyertomakeasensibledealinanall-stockdeal.You simplycan’texchangeanundervaluedstockforafully-valuedonewithouthurtingyourshareholders. Imagine,ifyouwill,CompanyAandCompanyB,ofequalsizeandbothwithbusinessesintrinsically worth$100pershare.Bothoftheirstocks,however,sellfor$80pershare.TheCEOofA,longonconfidence andshortonsmarts,offers11⁄4 sharesofAforeachshareofB,correctlytellinghisdirectorsthatBisworth$100 pershare.Hewillneglecttoexplain,though,thatwhatheisgivingwillcosthisshareholders$125inintrinsic value.Ifthedirectorsaremathematicallychallengedaswell,andadealisthereforecompleted,theshareholders ofBwillendupowning55.6%ofA&B’scombinedassetsandA’sshareholderswillown44.4%.Noteveryone atA,itshouldbenoted,isaloserfromthisnonsensicaltransaction.ItsCEOnowrunsacompanytwiceaslarge ashisoriginaldomain,inaworldwheresizetendstocorrelatewithbothprestigeandcompensation. 16Ifanacquirer’sstockisovervalued,it’sadifferentstory:Usingitasacurrencyworkstotheacquirer’s advantage.That’swhybubblesinvariousareasofthestockmarkethaveinvariablyledtoserialissuancesof stockbyslypromoters.Goingbythemarketvalueoftheirstock,theycanaffordtooverpaybecausetheyare,in effect,usingcounterfeitmoney.Periodically,manyair-for-assetsacquisitionshavetakenplace,thelate1960s havingbeenaparticularlyobsceneperiodforsuchchicanery.Indeed,certainlargecompanieswerebuiltinthis way.(Nooneinvolved,ofcourse,everpubliclyacknowledgestherealityofwhatisgoingon,thoughthereis plentyofprivatesnickering.) InourBNSFacquisition,thesellingshareholdersquiteproperlyevaluatedourofferat$100pershare. Thecosttous,however,wassomewhathighersince40%ofthe$100wasdeliveredinourshares,whichCharlie andIbelievedtobeworthmorethantheirmarketvalue.Fortunately,wehadlongownedasubstantialamountof BNSFstockthatwepurchasedinthemarketforcash.Alltold,therefore,onlyabout30%ofourcostoverallwas paidwithBerkshireshares. Intheend,CharlieandIdecidedthatthedisadvantageofpaying30%ofthepricethroughstockwas offsetbytheopportunitytheacquisitiongaveustodeploy$22billionofcashinabusinessweunderstoodand likedforthelongterm.IthastheadditionalvirtueofbeingrunbyMattRose,whomwetrustandadmire.We alsoliketheprospectofinvestingadditionalbillionsovertheyearsatreasonableratesofreturn.Butthefinal decisionwasacloseone.Ifwehadneededtousemorestocktomaketheacquisition,itwouldinfacthavemade nosense.Wewouldhavethenbeengivingupmorethanweweregetting. ************ Ihavebeenindozensofboardmeetingsinwhichacquisitionshavebeendeliberated,oftenwiththe directorsbeinginstructedbyhigh-pricedinvestmentbankers(arethereanyotherkind?).Invariably,thebankers givetheboardadetailedassessmentofthevalueofthecompanybeingpurchased,withemphasisonwhyitis worthfarmorethanitsmarketprice.Inmorethanfiftyyearsofboardmemberships,however,neverhaveIheard theinvestmentbankers(ormanagement!)discussthetruevalueofwhatisbeing given.Whenadealinvolvedthe issuanceoftheacquirer’sstock,theysimplyusedmarketvaluetomeasurethecost. Theydidthiseventhough theywouldhavearguedthattheacquirer’sstockpricewaswoefullyinadequate–absolutelynoindicatorofits realvalue–hadatakeoverbidfortheacquirerinsteadbeenthesubjectupfordiscussion. Whenstockisthecurrencybeingcontemplatedinanacquisitionandwhendirectorsarehearingfrom anadvisor,itappearstomethatthereisonlyonewaytogetarationalandbalanceddiscussion.Directorsshould hireasecondadvisortomakethecase against theproposedacquisition,withitsfeecontingentonthedeal not goingthrough.Absentthisdrasticremedy,ourrecommendationinrespecttotheuseofadvisorsremains:“Don’t askthebarberwhetheryouneedahaircut.” ************ Ican’tresisttellingyouatruestoryfromlongago.Weownedstockinalargewell-runbankthatfor decadeshadbeenstatutorilypreventedfromacquisitions.Eventually,thelawwaschangedandourbank immediatelybeganlookingforpossiblepurchases.Itsmanagers–finepeopleandablebankers–not unexpectedlybegantobehaveliketeenageboyswhohadjustdiscoveredgirls. Theysoonfocusedonamuchsmallerbank,alsowell-runandhavingsimilarfinancialcharacteristics insuchareasasreturnonequity,interestmargin,loanquality,etc.Ourbanksoldatamodestprice(that’swhy wehadboughtintoit),hoveringnearbookvalueandpossessingaverylowprice/earningsratio.Alongside, though,thesmall-bankownerwasbeingwooedbyotherlargebanksinthestateandwasholdingoutforaprice closetothreetimesbookvalue.Moreover,hewantedstock,notcash. Naturally,ourfellowscavedinandagreedtothisvalue-destroyingdeal.“Weneedtoshowthatweare inthehunt.Besides,it’sonlyasmalldeal,”theysaid,asifonly major harmtoshareholderswouldhavebeena legitimatereasonforholdingback.Charlie’sreactionatthetime:“Arewesupposedtoapplaudbecausethedog thatfoulsourlawnisaChihuahuaratherthanaSaintBernard?” 17Thesellerofthesmallerbank–nofool–thendeliveredonefinaldemandinhisnegotiations.“After themerger,”heineffectsaid,perhapsusingwordsthatwerephrasedmorediplomaticallythanthese,“I’mgoing tobealargeshareholderofyourbank,anditwillrepresentahugeportionofmynetworth.Youhavetopromise me,therefore,thatyou’llneveragaindoadealthisdumb.” Yes,themergerwentthrough.Theownerofthesmallbankbecamericher,webecamepoorer,andthe managersofthebigbank–newlybigger–livedhappilyeverafter. TheAnnualMeeting Ourbestguessisthat35,000peopleattendedtheannualmeetinglastyear(upfrom12– no zeros omitted–in1981).Withourshareholderpopulationmuchexpanded,weexpectevenmorethisyear.Therefore, wewillhavetomakeafewchangesintheusualroutine.Therewillbenochange,however,inourenthusiasm forhavingyouattend.CharlieandIliketomeetyou,answeryourquestionsand–bestofall–haveyou buy lots ofgoodsfromourbusinesses. ThemeetingthisyearwillbeheldonSaturday,May1st .Asalways,thedoorswillopenattheQwest Centerat7a.m.,andanewBerkshiremoviewillbeshownat8:30.At9:30wewillgodirectlytothe question-and-answerperiod,which(withabreakforlunchattheQwest’sstands)willlastuntil3:30.Aftera shortrecess,CharlieandIwillconvenetheannualmeetingat3:45.Ifyoudecidetoleaveduringtheday’s questionperiods,pleasedosowhile Charlie istalking.(Actfast;hecanbeterse.) Thebestreasontoexit,ofcourse,isto shop.Wewillhelpyoudothatbyfillingthe194,300-square- foothallthatadjoinsthemeetingareawithproductsfromdozensofBerkshiresubsidiaries.Lastyear,youdid yourpart,andmostlocationsrackeduprecordsales.Butyoucandobetter.(Afriendlywarning:IfIfindsales arelagging,Igettestyandlocktheexits.) GEICOwillhaveaboothstaffedbyanumberofitstopcounselorsfromaroundthecountry,allof themreadytosupplyyouwithautoinsurancequotes.Inmostcases,GEICOwillbeabletogiveyoua shareholderdiscount(usually8%).Thisspecialofferispermittedby44ofthe51jurisdictionsinwhichwe operate.(Onesupplementalpoint:Thediscountisnotadditiveifyouqualifyforanother,suchasthatgiven certaingroups.)Bringthedetailsofyourexistinginsuranceandcheckoutwhetherwecansaveyoumoney.For atleast50%ofyou,Ibelievewecan. BesuretovisittheBookworm.Amongthemorethan30booksandDVDsitwillofferaretwonew booksbymysons:Howard’s Fragile,avolumefilledwithphotosandcommentaryaboutlivesofstruggle aroundtheglobeandPeter’s LifeIsWhatYouMakeIt.Completingthefamilytrilogywillbethedebutofmy sisterDoris’sbiography,astoryfocusingonherremarkablephilanthropicactivities.Alsoavailablewillbe Poor Charlie’sAlmanac,thestoryofmypartner.Thisbookissomethingofapublishingmiracle–neveradvertised, yetyearafteryearsellingmanythousandsofcopiesfromitsInternetsite.(Shouldyouneedtoshipyourbook purchases,anearbyshippingservicewillbeavailable.) Ifyouareabigspender–or,forthatmatter,merelyagawker–visitElliottAviationontheeastsideof theOmahaairportbetweennoonand5:00p.m.onSaturday.TherewewillhaveafleetofNetJetsaircraftthat willgetyourpulseracing. Anattachmenttotheproxymaterialthatisenclosedwiththisreportexplainshowyoucanobtainthe credentialyouwillneedforadmissiontothemeetingandotherevents.Asforplane,hotelandcarreservations, wehaveagainsignedupAmericanExpress(800-799-6634)togiveyouspecialhelp.CarolPedersen,who handlesthesematters,doesaterrificjobforuseachyear,andIthankherforit.Hotelroomscanbehardtofind, butworkwithCarolandyouwillgetone. 18AtNebraskaFurnitureMart,locatedona77-acresiteon72nd StreetbetweenDodgeandPacific,we willagainbehaving“BerkshireWeekend”discountpricing.ToobtaintheBerkshirediscount,youmustmake yourpurchasesbetweenThursday,April29th andMonday,May3rd inclusive,andalsopresentyourmeeting credential.Theperiod’sspecialpricingwillevenapplytotheproductsofseveralprestigiousmanufacturersthat normallyhaveironcladrulesagainstdiscountingbutwhich,inthespiritofourshareholderweekend,havemade anexceptionforyou.Weappreciatetheircooperation.NFMisopenfrom10a.m.to9p.m.Mondaythrough Saturday,and10a.m.to6p.m.onSunday.OnSaturdaythisyear,from5:30p.m.to8p.m.,NFMishavinga BerkyvilleBBQtowhichyouareallinvited. AtBorsheims,wewillagainhavetwoshareholder-onlyevents.Thefirstwillbeacocktailreception from6p.m.to10p.m.onFriday,April30th.Thesecond,themaingala,willbeheldonSunday,May2nd,from9 a.m.to4p.m.OnSaturday,wewillbeopenuntil6p.m. WewillhavehugecrowdsatBorsheimsthroughouttheweekend.Foryourconvenience,therefore, shareholderpriceswillbeavailablefromMonday,April26th throughSaturday,May8th.Duringthatperiod, pleaseidentifyyourselfasashareholderbypresentingyourmeetingcredentialsorabrokeragestatementthat showsyouareaBerkshireholder.Enterwithrhinestones;leavewithdiamonds.Mydaughtertellsmethatthe moreyoubuy,themoreyousave(kidssaythedarnedestthings). OnSunday,inthemalloutsideofBorsheims,ablindfoldedPatrickWolff,twiceU.S.chesschampion, willtakeonallcomers–whowillhavetheireyeswideopen–ingroupsofsix.Nearby,NormanBeck,a remarkablemagicianfromDallas,willbewilderonlookers. Ourspecialtreatforshareholdersthisyearwillbethereturnofmyfriend,ArielHsing,thecountry’s top-rankedjuniortabletennisplayer(andagoodbettowinattheOlympicssomeday).Now14,Arielcameto theannualmeetingfouryearsagoanddemolishedallcomers,includingme.(Youcanwitnessmyhumiliating defeatonYouTube;justtypeinArielHsingBerkshire.) Naturally,I’vebeenplottingacomebackandwilltakeheronoutsideofBorsheimsat1:00p.m.on Sunday.Itwillbeathree-pointmatch,andafterIsoftenherup,allshareholdersareinvitedtotrytheirluckat similarthree-pointcontests.WinnerswillbegivenaboxofSee’scandy.Wewillhaveequipmentavailable,but bringyourownpaddleifyouthinkitwillhelp.(Itwon’t.) Gorat’swillagainbeopenexclusivelyforBerkshireshareholdersonSunday,May2nd,andwillbe servingfrom1p.m.until10p.m.Lastyear,though,itwasoverwhelmedbydemand.Withmanymorediners expectedthisyear,I’veaskedmyfriend,DonnaSheehan,atPiccolo’s–anotherfavoriterestaurantofmine–to serveshareholdersonSundayaswell.(Piccolo’sgiantrootbeerfloatismandatoryforanyfanoffinedining.)I plantoeatatbothrestaurants:Alloftheweekendactionmakesme really hungry,andIhavefavoritedishesat eachspot.Remember:TomakeareservationatGorat’s,call402-551-3733onApril1st (butnotbefore)andat Piccolo’scall402-342-9038. Regrettably,wewillnotbeabletohaveareceptionforinternationalvisitorsthisyear.Ourcountgrew toabout800lastyear,andmysimplysigningoneitemperpersontookabout21⁄2 hours.Sinceweexpecteven moreinternationalvisitorsthisyear,CharlieandIdecidedwemustdropthisfunction.Butbeassured,we welcomeeveryinternationalvisitorwhocomes. Lastyearwechangedourmethodofdeterminingwhatquestionswouldbeaskedatthemeetingand receivedmanydozensoflettersapplaudingthenewarrangement.Wewillthereforeagainhavethesamethree financialjournalistsleadthequestion-and-answerperiod,askingCharlieandmequestionsthatshareholdershave submittedtothembye-mail. 19Thejournalistsandtheire-mailaddressesare:CarolLoomis,ofFortune,whomaybee-mailedat cloomis@fortunemail.com;BeckyQuick,ofCNBC,atBerkshireQuestions@cnbc.com,andAndrewRoss Sorkin,ofTheNewYorkTimes,atarsorkin@nytimes.com.Fromthequestionssubmitted,eachjournalistwill choosethedozenorsoheorshedecidesarethemostinterestingandimportant.Thejournalistshavetoldme yourquestionhasthebestchanceofbeingselectedifyoukeepitconciseandincludenomorethantwoquestions inanye-mailyousendthem.(Inyoure-mail,letthejournalistknowifyouwouldlikeyournamementionedif yourquestionisselected.) NeitherCharlienorIwillgetsomuchasaclueaboutthequestionstobeasked.Weknowthe journalistswillpicksometoughonesandthat’sthewaywelikeit. Wewillagainhaveadrawingat8:15onSaturdayateachof13microphonesforthoseshareholders wishingtoaskquestionsthemselves.Atthemeeting,Iwillalternatethequestionsaskedbythejournalistswith thosefromthewinningshareholders.We’veadded30minutestothequestiontimeandwillprobablyhavetime forabout30questionsfromeachgroup. *********** At86and79,CharlieandIremainluckybeyondourdreams.WewereborninAmerica;hadterrific parentswhosawthatwegotgoodeducations;haveenjoyedwonderfulfamiliesandgreathealth;andcame equippedwitha“business”genethatallowsustoprosperinamannerhugelydisproportionatetothat experiencedbymanypeoplewhocontributeasmuchormoretooursociety’swell-being.Moreover,wehave longhadjobsthatwelove,inwhichwearehelpedincountlesswaysbytalentedandcheerfulassociates.Indeed, overtheyears,ourworkhasbecomeevermorefascinating;nowonderwetap-dancetowork.Ifpushed,we wouldgladlypaysubstantialsumstohaveourjobs(butdon’ttelltheCompCommittee). Nothing,however,ismorefunforusthangettingtogetherwithourshareholder-partnersatBerkshire’s annualmeeting.SojoinusonMay1st attheQwestforourannualWoodstockforCapitalists.We’llseeyou there. February26,2010WarrenE.Buffett ChairmanoftheBoard P.S.Comebyrail. 20
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