warren buffet 1998 shareholder letter

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  • 8/13/2019 Warren Buffet 1998 Shareholder letter

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    BERKSHIRE HATHAWAY INC.

    To the Shareholders of Berkshire Hathaway Inc.

    Our gain in net worth during 1998 was $25.9 billion, which increased the per-

    share book value of both our lass ! and lass " stock b# 8.%&. Over the last %#ears 'that is, since present (anage(ent took over) per-share book value has grownfro( $19 to $%*,8+1, a rate of 2.*& co(pounded annuall#.

    !ll figures used in this report appl# to "erkshires ! shares, the successor to theonl# stock that the co(pan# had outstanding before 199. /he " shares have anecono(ic interest e0ual to 1%+th that of the !.

    or(all#, a gain of 8.%& would call for handsprings -- but not this #ear.

    3e(e(ber 4agner, whose (usic has been described as better than it sounds 4ell,"erkshires progress in 1998 -- though (ore than satisfactor# -- was not as good as itlooks. /hats because (ost of that 8.%& gain ca(e fro( our issuing shares inac0uisitions.

    /o e6plain7 Our stock sells at a large pre(iu( over book value, which (eansthat an# issuing of shares we do -- whether for cash or as consideration in a (erger --instantl# increases our per-share book-value figure, even though weve earned not adi(e. 4hat happens is that we get (ore per-share book value in such transactions

    than we give up. /hese transactions, however, do not deliver us an# i((ediate gain inper-share intrinsic value, because in this respect what we give and what we get areroughl# e0ual. !nd, as harlie unger, "erkshires ice hair(an and (# partner,and : cant tell #ou too often 'though #ou (a# feel that we tr#), its the per-share gainin intrinsic value that counts rather than the per-share gain in book value. /hough"erkshires intrinsic value grew ver# substantiall# in 1998, the gain fell well short ofthe 8.%& recorded for book value. evertheless, intrinsic value still fare6ceeds bookvalue. ';or a (ore e6tensive discussion of these ter(s, and other invest(ent andaccounting concepts, please refer to our Owners anual, on pages 5-, in whichwe set forth our owner-related business principles. :ntrinsic value is discussed on

    pages 1 and 2.)

    4e entered 1999 with the best collection of businesses and (anagers in ourhistor#. /he two co(panies we ac0uired in 1998, et, arefirst-class in ever# wa# -- (ore about both later -- and the perfor(ance of ouroperating businesses last #ear e6ceeded (# hopes.

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    :n our last three annual reports, we furnished #ou a table that we regard ascentral to esti(ating "erkshires intrinsic value. :n the updated version of that table,which follows, we trace our two ke# co(ponents of value, including

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    urrentl# we are working to co(pound a net worth of $5*. billion, the largestof an# !(erican corporation 'though our figure will be eclipsed if the (erger of=66on and obil takes place). Of course, our lead in net worth does not (ean that"erkshire outranks all other businesses in value7 arket value is what counts forowners and

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    4riting checks to the :3@ that include strings of Ceros does not bother harlieor (e. "erkshire as a corporation, and we as individuals, have prospered in !(ericaas we would have in no other countr#. :ndeed, if we lived in so(e other part of theworld and co(pletel# escaped ta6es, :( sure we would be worse off financiall# 'andin (an# other wa#s as well). Overall, we feel e6traordinaril# luck# to have been dealt

    a hand in life that enables us to write large checks to the govern(ent rather than onere0uiring the govern(ent to regularl# write checks to us -- sa#, because we aredisabled or une(plo#ed.

    "erkshires ta6 situation is so(eti(es (isunderstood. ;irst, capital gains haveno special attraction for us7 ! corporation pa#s a %5& rate on ta6able inco(e,whether it co(es fro( capital gains or fro( ordinar# operations. /his (eans that"erkshires ta6 on a long-ter( capital gain is full# *5& higher than what an individualwould pa# on an identical gain.

    @o(e people harbor another (isconception, believing that we can e6clude *+&

    of all dividends we receive fro( our ta6able inco(e. :ndeed, the *+& rate applies to(ost corporations and also applies to "erkshire in cases where we hold stocks in non-insurance subsidiaries. Eowever, al(ost all of our e0uit# invest(ents are owned b#our insurance co(panies, and in that case the e6clusion is 59.5&. /hat still (eans adollar of dividends is considerabl# (ore valuable to us than a dollar of ordinar#inco(e, but not to the degree often assu(ed.

    "erkshire trul# went all out for the /reasur# last #ear. :n connection with the

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    than a #ear. /he other 5+& is tied to growth in polic#holders -- and here we havestepped on the gas.

    :n 1995, the #ear prior to its ac0uisition b# "erkshire,

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    for (ore than a #ear -- (a# well have been the highest percentage pa#(ent at an#large co(pan# in the countr#. ':n addition, associates benefit fro( a co(pan#-funded

    pension plan.)

    /he %2.%& (a# turn out to be a high-water (ark, given that the profitabilit#

    co(ponent in our profit-sharing calculation is al(ost certain to co(e down in thefuture. /he growth co(ponent, though, (a# well increase. Overall, we e6pect the two

    bench(arks together to dictate ver# significant profit-sharing pa#(ents for decades toco(e. ;or our associates, growth pa#s off in other wa#s as well7 Jast #ear we

    pro(oted ,12 people.

    :(pressive as the

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    :ndeed, a (a?orit# of our shares are held b# investors who e6pect to die still holdingthe(. 4e can therefore ask our =Os to (anage for (a6i(u( long-ter( value,rather than for ne6t 0uarters earnings. 4e certainl# dont ignore the current results ofour businesses -- in (ost cases, the# are of great i(portance -- but we neverwantthe( to be achieved at the e6pense of our building ever-greater co(petitive strengths.

    : believe the !), #ou needso(e understanding of its business, which is selling fractional shares of ?ets andoperating the fleet for its (an# owners. 3ich @antulli, =O of =>!, created thefractional ownership industr# in 198, b# visualiCing an i(portant new wa# of using

    planes. /hen he co(bined guts and talent to turn his idea into a (a?or business.

    :n a fractional ownership plan, #ou purchase a portion -- sa# 18th -- of an# of awide variet# of ?ets that =>! offers. /hat purchase entitles #ou to 1++ hours of fl#ingti(e annuall#. 'GFead-headG hours dont count against #our allot(ent, and #ou arealso allowed to average #our hours over five #ears.) :n addition, #ou pa# both a(onthl# (anage(ent fee and a fee for hours actuall# flown.

    /hen, on a few hours notice, =>! (akes #our plane, or another at least as good,available to #ou at #our choice of the 55++ airports in the H.@. :n effect, calling up

    #our plane is like phoning for a ta6i.

    : first heard about the et>etsL progra(, as it is called, about four #ears agofro( ;rank 3oone#, our (anager at E.E. "rown. ;rank had used and been delightedwith the service and suggested that : (eet 3ich to investigate signing up for (#fa(il#s use. :t took 3ich about 15 (inutes to sell (e a 0uarter '2++ hours annuall#)of a Eawker 1+++. @ince then, (# fa(il# has learned firsthand -- through fl#ing 9++hours on %++ trips -- what a friendl#, efficient, and safe operation =>! runs. Iuitesi(pl#, the# love this service. :n fact, the# 0uickl# grew so enthusiastic that : did atesti(onial ad for =>! long before : knew there was an# possibilit# of our purchasingthe business. : did, however, ask 3ich to give (e a call if he ever got interested in

    selling. Juckil#, he phoned (e last a#, and we 0uickl# (ade a $*25 (illion deal,pa#ing e0ual a(ounts of cash and stock.

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    =>!, which is b# far the largest operator in its industr#, has (ore than 1,+++custo(ers and 1% aircraft 'including 2% GcoreG aircraft that are owned or leased b#=>! itself, so that it can (ake sure that service is first-class even during the ti(eswhen de(and is heaviest). @afet#, of course, is the para(ount issue in an# flightoperation, and 3ichs pilots -- now nu(bering about 5+ -- receive e6tensive training

    at least twice a #ear fro( ;light@afet# :nternational, another "erkshire subsidiar# andthe world leader in pilot training. /he botto( line on our pilots7 :ve sold the"erkshire plane and will now do all of (# business fl#ing, as well as (# personalfl#ing, with et>ets crews.

    "eing the leader in this industr# is a (a?or advantage for all concerned. Ourcusto(ers gain because we have an ar(ada of planes positioned throughout thecountr# at all ti(es, a blanketing that allows us to provide un(atched service.eanwhile, we gain fro( the blanketing because it reduces dead-head costs. !notherco(pelling attraction for our clients is that we offer products fro( "oeing,ets is like a ph#sicianwho can reco((end whatever (edicine best fits the needs of each patientK ourco(petitors, in contrast, are producers of a GhouseG brand that the# (ust prescribe forone and all.

    :n (an# cases our clients, both corporate and individual, own fractions ofseveral different planes and can therefore (atch specific planes to specific (issions.;or e6a(ple, a client (ight own 11th of three different ?ets 'each giving it 5+ hoursof fl#ing ti(e), which in total give it a virtual fleet, obtained for a s(all fraction of thecost of a single plane.

    @ignificantl#, it is not onl# s(all businesses that can benefit fro( fractionalownership. !lread#, so(e of !(ericas largest co(panies use et>ets as asupple(ent to their own fleet. /his saves the( big (one# in both (eeting peakre0uire(ents and in fl#ing (issions that would re0uire their wholl#-owned planes tolog a disproportionate a(ount of dead-head hours.

    4hen a plane is slated for personal use, the clinching argu(ent is that either theclient signs up now or his children likel# will later. /hats an e0uation : e6plained to(# wonderful !unt !lice + #ears ago when she asked (e whether she could afford afur coat. # repl# settled the issue7 G!lice,youarent bu#ing itK #our heirs are.G

    =>!s growth has been e6plosive7 :n 199*, it accounted for %1& of all corporate?ets ordered in the world. onetheless, 3ich and : believe that the potential offractional ownership has barel# been scratched. :f (an# thousands of owners find itsensible to own 1++& of a plane -- which (ust be used %5+-++ hours annuall# if itsto (ake econo(ic sense -- there (ust be a large (ultiple of that nu(ber for who(fractional ownership works.

    :n addition to being a terrific e6ecutive, 3ich is fun. Jike (ost of our (anagers,he has no econo(ic need whatsoever to work. 3ich spends his ti(e at =>! becauseits his bab# -- and he wants to see how far he can take it. 4e both alread# know the

    answer, both literall# and figurativel#7 to the ends of the earth.

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    !nd now a s(all hint to "erkshire directors7 Jast #ear : spent (ore than nineti(es (# salar# at "orshei(s and =>!. >ust think how "erkshires business would

    boo( if #oud onl# spring for a raise.

    "eneral Re

    On Fece(ber 21, we co(pleted our $22 billion ac0uisition of

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    4hat

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    big-na(e auditors have i(plicitl# blessed. !s for "erkshire, harlie and : atte(pt tobe conservative in presenting its underwriting results to #ou, because we have foundthat virtuall# all surprises in insurance are unpleasant ones.

    /he table that follows shows the float generated b# "erkshires insurance

    operations since we entered the business %2 #ears ago. /he data are for ever# fifth#ear and also the last, which includes

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    reported had we not purchased the(. ;or the reasons discussed on pages 2 and %,this for( of presentation see(s to us to be (ore useful to investors and (anagers thanone utiliCing generall#-accepted accounting principles '

    purchase-pre(iu(s to be charged off business-b#-business. /he total earnings weshow in the table are, of course, identical to the

    state(ents.

    (in millions)

    Berkshire's Share

    of Net Earnings

    (after taxes and

    Pre-Tax Earnings minority interests)

    !!" !!# !!" !!#

    Operating =arnings7

    :nsurance ewelr# . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %9 %2 2% 18

    @cott ;etCer 'e6cluding finance operation) . . . . . 1%* 119 85 **

    @ees andies . . . . . . . . . . . . . . . . . . . . . . . . . . 2 59 + %5

    @hoe

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    !n e6a(ple7 :n (# 199 letter, : reported on 3alph @che#s e6traordinar#perfor(ance at @cott ;etCer. Jittle did : realiCe that he was ?ust war(ing up. Jast #ear@cott ;etCer, operating with no leverage 'e6cept for a conservative level of debt in itsfinance subsidiar#), earned a record $9.5 (illion after-ta6 on its $112 (illion networth.

    /oda#, "erkshire has an unusuall# large nu(ber of individuals, such as 3alph,who are trul# legends in their industries. an# of these ?oined us when we purchasedtheir co(panies, but in recent #ears we have also identified a nu(ber of strong(anagers internall#. 4e further e6panded our corps of all-stars in an i(portant wa#when we ac0uired !.

    harlie and : have the eas# ?obs at "erkshire7 4e do ver# little e6cept allocatecapital. !nd, even then, we are not all that energetic. 4e have one e6cuse, though7 :nallocating capital, activit# does not correlate with achieve(ent. :ndeed, in the fields ofinvest(ents and ac0uisitions, frenetic behavior is often counterproductive. /herefore,

    harlie and : (ainl# ?ust wait for the phone to ring.

    Our (anagers, however, work ver# hard -- and it shows. aturall#, the# want tobe paid fairl# for their efforts, but pa# alone cant e6plain their e6traordinar#acco(plish(ents. :nstead, each is pri(aril# (otivated b# a vision of ?ust how far hisor her business can go -- and b# a desire to be the one who gets it there. harlie and :thank the( on #our behalf and ours.

    !dditional infor(ation about our various businesses is given on pages %9-5%,where #ou will also find our seg(ent earnings reported on a

    In0est2ents

    "elow we present our co((on stock invest(ents. /hose with a (arket value of(ore than $*5+ (illion are ite(iCed.

    1+1!"

    Shares 2om0any 2ost3 4arket

    (dollars in millions)

    5+,5%,9++ !(erican =6press o(pan# . . . . . . . . . . . . . . . . . . . . $1,*+ $ 5,18+

    2++,+++,+++ /he oca-ola o(pan# . . . . . . . . . . . . . . . . . . . . . . 1,299 1%,++

    51,2+2,22 /he 4alt Fisne# o(pan# . . . . . . . . . . . . . . . . . . . . . 281 1,5%+,298,+++ ;reddie ac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %+8 %,885

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    9,+++,+++ /he Furing the #ear, we slightl# increased our holdings in !(erican =6press, one ofour three largest co((it(ents, and left the other two unchanged. Eowever, wetri((ed or substantiall# cut (an# of our s(aller positions. Eere, : need to (ake aconfession 'ugh)7 /he portfolio actions : took in 1998 actuall# decreased our gain for

    the #ear. :n particular, (# decision to sell cFonalds was a ver# big (istake.Overall, #ou would have been better off last #ear if : had regularl# snuck off to the(ovies during (arket hours.

    !t #earend, we held (ore than $15 billion in cash e0uivalents 'including high-grade securities due in less than one #ear). ash never (akes us happ#. "ut its betterto have the (one# burning a hole in "erkshires pocket than resting co(fortabl# inso(eone elses. harlie and : will continue our search for large e0uit# invest(ents or,

    better #et, a reall# (a?or business ac0uisition that would absorb our li0uid assets.urrentl#, however, we see nothing on the horiCon.

    Once we knew that the

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    Our never-co((ent-even-if-untrue polic# in regard to invest(ents (a#disappoint Gpigg#backersG but will benefit owners7 Dour "erkshire shares would beworth less if we discussed what we are doing. :ncidentall#, we should warn #ou that(edia speculation about our invest(ent (oves continues in (ost cases to beincorrect. Beople who rel# on such co((entar# do so at their own peril.

    Acco/ntin5 && 3art %

    Our

    /hough the two plans are an econo(ic wash, the cash plan we are putting in willproduce a vastl# different accounting result. /his !lice-in-4onderland outco(eoccurs because e6isting accounting principles ignore the cost of stock options whenearnings are being calculated, even though options are a huge and increasing e6penseat a great (an# corporations. :n effect, accounting principles offer (anage(ent achoice7 Ba# e(plo#ees in one for( and count the cost, or pa# the( in another for(and ignore the cost. @(all wonder then that the use of options has (ushroo(ed. /his

    lop-sided choice has a big downside for owners, however7 /hough options, if properl#structured, can be an appropriate, and even ideal, wa# to co(pensate and (otivate top(anagers, the# are (ore often wildl# capricious in their distribution of rewards,inefficient as (otivators, and inordinatel# e6pensive for shareholders.

    4hatever the (erits of options (a# be, their accounting treat(ent is outrageous./hink for a (o(ent of that $19+ (illion we are going to spend for advertising at

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    Berhaps "ishop "erkele# -- #ou (a# re(e(ber hi( as the philosopher who(used about trees falling in a forest when no one was around -- would believe that ane6pense unseen b# an accountant does not e6ist. harlie and :, however, have trouble

    being philosophical about unrecorded costs. 4hen we consider investing in an option-issuing co(pan#, we (ake an appropriate downward ad?ust(ent to reported earnings,

    si(pl# subtracting an a(ount e0ual to what the co(pan# could have realiCed b#publicl# selling options of like 0uantit# and structure. @i(ilarl#, if we conte(plate anac0uisition, we include in our evaluation the cost of replacing an# option plan. /hen,if we (ake a deal, we pro(ptl# take that cost out of hiding.

    3eaders who disagree with (e about options will b# this ti(e be (entall#0uarreling with (# e0uating the cost of options issued to e(plo#ees with those that(ight theoreticall# be sold and traded publicl#. :t is true, to state one of theseargu(ents, that e(plo#ee options are so(eti(es forfeited -- that lessens the da(agedone to shareholders -- whereas publicl#-offered options would not be. :t is true, also,that co(panies receive a ta6 deduction when e(plo#ee options are e6ercisedK

    publicl#-traded options deliver no such benefit. "ut theres an offset to these points7Options issued to e(plo#ees are often repriced, a transfor(ation that (akes the((uch (ore costl# than the public variet#.

    :ts so(eti(es argued that a non-transferable option given to an e(plo#ee is lessvaluable to hi( than would be a publicl#-traded option that he could freel# sell. /hatfact, however, does not reduce the costof the non-transferable option

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    :t was once relativel# eas# to tell the good gu#s in accounting fro( the bad7 /helate 19+s, for e6a(ple, brought on an org# of what one charlatan dubbed Gbold,i(aginative accountingG 'the practice of which, incidentall#, (ade hi( loved for ati(e b# 4all @treet because he never (issed e6pectations). "ut (ost investors of that

    period knew who was pla#ing ga(es. !nd, to their credit, virtuall# all of !(ericas

    (ost-ad(ired co(panies then shunned deception.

    :n recent #ears, probit# has eroded. an# (a?or corporations still pla# thingsstraight, but a significant and growing nu(ber of otherwise high-grade (anagers --=Os #ou would be happ# to have as spouses for #our children or as trustees under#our will -- have co(e to the view that its oka# to (anipulate earnings to satisf# whatthe# believe are 4all @treets desires. :ndeed, (an# =Os think this kind of(anipulation is not onl# oka#, but actuall# their duty.

    /hese (anagers start with the assu(ption, all too co((on, that their ?ob at allti(es is to encourage the highest stock price possible 'a pre(ise with which we

    ada(antl# disagree). /o pu(p the price, the# strive, ad(irabl#, for operationale6cellence. "ut when operations dont produce the result hoped for, these =Os resortto unad(irable accounting stratage(s. /hese either (anufacture the desiredGearningsG or set the stage for the( in the future.

    3ationaliCing this behavior, these (anagers often sa# that their shareholders willbe hurt if their currenc# for doing deals -- that is, their stock -- is not full#-priced, andthe# also argue that in using accounting shenanigans to get the figures the# want, the#are onl# doing what ever#bod# else does. Once such an ever#bod#s-doing-it attitudetakes hold, ethical (isgivings vanish. all this behavior @on of

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    ;or those who prefer to cheat up front, there would be a variant of this strateg#./he golfer, pla#ing alone with a cooperative cadd#-auditor, should defer the recordingof bad holes, take four 8+s, accept the plaudits he gets for such athleticis( andconsistenc#, and then turn in a fifth card carr#ing a 1+ score. !fter rectif#ing hisearlier scorekeeping sins with this Gbig bath,G he (a# (u(ble a few apologies but

    will refrain fro( returning the su(s he has previousl# collected fro( co(paringscorecards in the clubhouse. '/he cadd#, need we add, will have ac0uired a lo#al

    patron.)

    Hnfortunatel#, =Os who use variations of these scoring sche(es in real lifetend to beco(e addicted to the ga(es the#re pla#ing -- after all, its easier to fiddlewith the scorecard than to spend hours on the practice tee -- and never (uster the willto give the( up. /heir behavior brings to (ind oltaires co((ent on se6uale6peri(entation7 GOnce a philosopher, twice a pervert.G

    :n the ac0uisition arena, restructuring has been raised to an art for(7

    anage(ents now fre0uentl# use (ergers to dishonestl# rearrange the value of assetsand liabilities in wa#s that will allow the( to both s(ooth and swell future earnings.:ndeed, at deal ti(e, (a?or auditing fir(s so(eti(es point out the possibilities for alittle accounting (agic 'or for a lot).

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    (erger-related ite(s, and write-downs -- identified no less than 1,%9 of these,totaling $*2.1 billion. /hat is a staggering a(ount as evidenced b# this bit of

    perspective7 /he 199* earnings of the 5++ co(panies in ;ortunes fa(ous list totaled$%2 billion.

    learl# the attitude of disrespect that (an# e6ecutives have toda# for accuratereporting is a business disgrace. !nd auditors, as we have alread# suggested, havedone little on the positive side. /hough auditorsshouldregard the investing public astheir client, the# tend to kowtow instead to the (anagers who choose the( and doleout their pa#. 'G4hose bread : eat, his song : sing.G)

    ! big piece of news, however, is that the @=, led b# its chair(an, !rthurJevitt, see(s deter(ined to get corporate !(erica to clean up its act. :n a land(arkspeech last @epte(ber, Jevitt called for an end to Gearnings (anage(ent.G Eecorrectl# observed, G/oo (an# corporate (anagers, auditors and anal#sts are

    participants in a ga(e of nods and winks.G !nd then he laid on a real indict(ent7

    Ganaging (a# be giving wa# to (anipulatingK integrit# (a# be losing out toillusion.G

    : urge #ou to read the hair(ans speech '#ou can find it on the :nternet atwww.sec.gov) and to support hi( in his efforts to get corporate !(erica to deliver astraight stor# to its owners. Jevitts ?ob will be Eerculean, but it is hard to think ofanother (ore i(portant for hi( to take on.

    Re4orts to Shareholders

    "erkshires :nternet site, www.berkshirehathawa#.co(, has beco(e a pri(esource for infor(ation about the co(pan#. 4hile we continue to send an annualreport to all shareholders, we now send 0uarterlies onl# to those who re0uest the(,letting others read these at our site. :n this report, we again enclose a card that can bereturned b# those wanting to get printed 0uarterlies in 1999.

    harlie and : have two si(ple goals in reporting7 1) 4e want to give #ou theinfor(ation that we would wish #ou to give us if our positions were reversedK and 2)4e want to (ake "erkshires infor(ation accessible to all of #ou si(ultaneousl#. Ourabilit# to reach that second goal is greatl# helped b# the :nternet.

    :n another portion of his @epte(ber speech, !rthur Jevitt deplored what hecalled Gselective disclosure.G Eis re(arks were ti(el#7 /oda#, (an# co(panies(atter-of-factl# favor 4all @treet anal#sts and institutional investors in a variet# ofwa#s that often skirt or cross the line of unfairness. /hese practices leave the great

    bulk of shareholders at a distinct disadvantage to a favored class.

    !t "erkshire, we regard the holder of one share of " stock as the e0ual of ourlarge institutional investors. 4e, of course, war(l# welco(e institutions as ownersand have gained a nu(ber of the( through the

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    if it is Gearnings guidanceG or the like that shareholders or anal#sts seek, we willsi(pl# guide the( to our public docu(ents.

    /his #ear we plan to post our 0uarterl# reports on the :nternet after the close ofthe (arket on a# 1, !ugust 1%, and ove(ber 12. 4e also e6pect to put the 1999

    annual report on our website on @aturda#, arch 11, 2+++, and to (ail the printversion at roughl# the sa(e ti(e.

    4e pro(ptl# post press releases on our website. /his (eans that #ou do notneed to rel# on the versions of these reported b# the (edia but can instead read thefull te6t on #our co(puter.

    Fespite the pathetic technical skills of #our hair(an, :( delighted to reportthat ain, who over the last decade has

    personall# accounted for a significant portion of "erkshires operating earnings. 4hileharlie and : sleep, !?it keeps thinking of new wa#s to add value to "erkshire.

    Shareholder&7esi5nated Contri8/tions

    !bout 9*.5& of all eligible shares participated in "erkshires 1998 shareholder-designated contributions progra(, with contributions totaling $1.9 (illion. ! fulldescription of the progra( appears on pages 5-55.

    u(ulativel#, over the 18 #ears of the progra(, "erkshire has (ade

    contributions of $1%+ (illion pursuant to the instructions of our shareholders. /he restof "erkshires giving is done b# our subsidiaries, which stick to the philanthropicpatterns that prevailed before the# were ac0uired 'e6cept that their for(er ownersthe(selves take on the responsibilit# for their personal charities). :n aggregate, oursubsidiaries (ade contributions of $12.5 (illion in 1998, including in-kind donationsof $2.+ (illion.

    To 0artici0ate in future 0rograms you must o6n 2lass & shares that are

    registered in the name of the actual o6ner not the nominee name of a .roker .ank

    or de0ository Shares not so registered on &ugust + !!! 6ill .e ineligi.le for the

    !!! 0rogram 7hen you get the contri.utions form from us return it 0rom0tly so

    that it does not get 0ut aside or forgotten esignations received after the due date6ill not .e honored

    The Ann/al 9eetin5

    /his #ears 4oodstock for apitalists will be held a# 1-%, and we (a# face aproble(. Jast #ear (ore than 1+,+++ people attended our annual (eeting, and ourshareholders list has since doubled. @o we dont 0uite know what attendance to e6pectthis #ear. /o be safe, we have booked both !ksarben oliseu(, which holds about1,+++ and the Eolida# onvention entre, which can seat an additional 5,+++."ecause we know that our O(aha shareholders will want to be good hosts to the out-

    of-towners '(an# of the( co(e fro( outside the H.@), we plan to give those visitorsfirst crack at the !ksarben tickets and to subse0uentl# allocate these to greater O(aha

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    residents on a first-co(e, first-served basis. :f we e6haust the !ksarben tickets, wewill begin distributing Eolida# tickets to O(aha shareholders.

    :f we end up using both locations, harlie and : will split our pre-(eeting ti(ebetween the two. !dditionall#, we will have e6hibits and also the "erkshire (ovie,

    large television screens and (icrophones at both sites. 4hen we break for lunch,(an# attendees will leave !ksarben, which (eans that those at Eolida# can, if the#wish, (ake the five-(inute trip to !ksarben and finish out the da# there. "uses will

    be available to transport people who dont have cars.

    /he doors will open at both locations at * a.(. on onda#, and at 87%+ we willpre(ier the 1999 "erkshire (ovie epic, produced b# arc Ea(burg, our ;O. /he(eeting will last fro( 97%+ until %7%+, interrupted onl# b# the short lunch break.

    !n attach(ent to the pro6# (aterial that is enclosed with this report e6plainshow #ou can obtain the badge #ou will need for ad(ission to the (eeting and other

    events. !s for plane, hotel and car reservations, we have again signed up !(erican=6press '8++-*99-%) to give #ou special help. :n our nor(al fashion, we will run

    buses fro( the larger hotels to the (eeting. !fter the (eeting, these will (ake tripsback to the hotels and to ebraska ;urniture art, "orshei(s and the airport. =venso, #ou are likel# to find a car useful.

    /he full line of "erkshire products will be available at !ksarben, and the (orepopular ite(s will also be at Eolida#. Jast #ear we set sales records across-the-board,(oving %,*++ pounds of @ees cand#, 1,%5 pairs of Fe6ter shoes, 1,15+ sets ofIuikut knives and %,1+ "erkshire shirts and hats. !dditionall#, $2,9 of 4orld"ook products were purchased as well as (ore than 2,+++ golf balls with the"erkshire Eathawa# logo. harlie and : are pleased but not satisfied with thesenu(bers and confidentl# predict new records in all categories this #ear. Our 1999apparel line will be unveiled at the (eeting, so please defer #our designer purchasesuntil #ou view our collection.

    Fair# Iueen will also be on hand and will again donate all proceeds to thehildrens iracle etwork. Jast #ear we sold about ,+++ Fill#Lbars, fudge barsand vanillaorange bars. !dditionall#,

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    ;s (ulti-stored co(ple6, located on a *5-acre site about a (ile fro(!ksarben, is open fro( 1+ a.(. to 9 p.(. on weekda#s, and 1+ a.(. to p.(. on@aturda#s and @unda#s. /his operation did $%++ (illion in business during 1998 andoffers an unrivaled breadth of (erchandise -- furniture, electronics, appliances,carpets and co(puters -- all at cant-be-beat prices. Furing the !pril %+th to a# th

    period, shareholders presenting their (eeting badge will receive a discount that iscusto(aril# given onl# to its e(plo#ees.

    "orshei(s nor(all# is closed on @unda# but will be open for shareholders fro(1+ a.(. to p.(. on a# 2nd. On annual (eeting weekend last #ear, the store did anincredible a(ount of business. @ales were double those of the previous #ear, and thestores volu(e on @unda# greatl# e6ceeded volu(e for an# da# in "orshei(s histor#.harlie attributes this record to the fact that he autographed sales tickets that da# and,while : have (# doubts about this proposition, we are not about to (ess with awinning for(ula. Blease give hi( writers cra(p. On last #ears @unda#, "orshei(swrote 2,5+1 tickets during the eight hours it was open. ;or those of #ou who are

    (athe(aticall# challenged, that is one ticket ever# 11 seconds.

    @hareholders who wish to avoid @unda#s crowd can visit "orshei(s on@aturda# '1+ a.(.-57%+ p.(.) or on onda# '1+ a.(.-8 p.(.). "e sure to identif##ourself as a "erkshire owner so that @usan >ac0ues, "orshei(s =O, can 0uote #oua Gshareholder-weekendG price. @usan ?oined us in 198% as a $-per-hour salespersonand was (ade =O in 199. /his (ove ranks as one of (# best (anagerial decisions.

    "ridge pla#ers can look forward to a thrill on @unda#, when "ob Ea((an -- thebest the ga(e has ever seen -- will turn up to pla# with our shareholders in the (alloutside of "orshei(s. "ob pla#s without sorting his cards -- he#, (a#be thats whatswrong with (# ga(e. 4e will also have a couple of other tables at which anothere6pert or two will be pla#ing.

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    :t wouldnt be right to close without a word about the 11.8 people who workwith (e in "erkshires corporate office. :n addition to handling the (#riad of ta6,regulator# and ad(inistrative (atters that co(e with owning doCens of businesses,

    this group efficientl# and cheerfull# (anages various special pro?ects, so(e of whichgenerate hundreds of in0uiries. Eeres a sa(ple of what went on in 19987

    ,1+ shareholders designated %,88+ charities to receive contributions.

    Mell# uche(ore processed about 1*,5++ ad(ission tickets for the annual

    (eeting, along with orders and checks for %,2++ baseball tickets. Mell# and arc Ea(burg produced and directed the !ksarben e6travaganCa, a

    ?ob that re0uired the( to arrange the presentations (ade b# our subsidiaries,prepare our (ovie, and so(eti(es lend people a hand with travel and lodging.

    Febbie "osanek satisfied the var#ing needs of the (edia organiCations '1%

    of the( non-H.@.) that covered the (eeting, and (eanwhile, as alwa#s,skillfull# assisted (e in ever# aspect of (# ?ob.

    Febbie and arc asse(bled the data for our annual report and oversaw the

    production and distribution of 15,+++ copies. '/his #ear the nu(ber will be%25,+++.)

    arc handled 95& of the details -- and (uch of the substance -- connectedwith our co(pleting two (a?or (ergers.

    Mell#, Febbie and Feb 3a# dealt efficientl# with tens of thousands of re0uests

    for annual reports and financial infor(ation that ca(e through the office.

    Dou and : are pa#ing for onl# 11.8 people, but we are getting what would at

    (ost places be the output of 1++. /o all of the 11.8, (# thanks.

    arch 1, 1999

    4arren =. "uffetthair(an of the "oard