warren buffet 1999 shareholder letter

8/13/2019 Warren Buffet 1999 Shareholder letter

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BERKSHIRE HATHAWAY INC.

To the Shareholders of Berkshire Hathaway Inc.

Our gain in net worth during 1999 was $358 million, which increased the per-share book value of both our lass ! and lass " stock b# %5&% Over the last 35#ears 'that is, since present management took over( per-share book value has grownfrom $19 to $3),98), a rate of *+%& compounded annuall#%

!ll figures used in this report appl# to "erkshires ! shares, the successor to theonl# stock that the compan# had outstanding before 199.% /he " shares have aneconomic interest e0ual to 13th that of the !%

/he numbers on the facing page show 2ust how poor our 1999 record was% e hadthe worst absolute performance of m# tenure and, compared to the 46, the worstrelative performance as well% 7elative results are what concern us Over time, badrelative numbers will produce unsatisfactor# absolute results%

ven :nspector louseau could find last #ears guilt# part# #our hairman% ;#performance reminds me of the 0uarterback whose report card showed four 4on,> he drawled, >: think#oure spending too much time on that one sub2ect%>

;# >one sub2ect> is capital allocation, and m# grade for 1999 most assuredl# is a=% hat most hurt us during the #ear was the inferior performance of "erkshirese0uit# portfolio -- and responsibilit# for that portfolio, leaving aside the small pieceof it run b# ?ou 4impson of @:O, is entirel# mine% 4everal of our largest investees

badl# lagged the market in 1999 because the#ve had disappointing operating results%e still like these businesses and are content to have ma2or investments in them% "uttheir stumbles damaged our performance last #ear, and its no sure thing that the# will0uickl# regain their stride%

/he fallout from our weak results in 1999 was a more-than-commensurate drop inour stock price% :n 1998, to go back a bit, the stock outperformed the business% ?ast#ear the business did much better than the stock, a divergence that has continued tothe date of this letter% Over time, of course, the performance of the stock must roughl#match the performance of the business%

=espite our poor showing last #ear, harlie ;unger, "erkshires Aice hairmanand m# partner, and : eBpect that the gain in "erkshires intrinsic value over the neBtdecade will modestl# eBceed the gain from owning the 46% e cant guarantee that,of course% "ut we are willing to back our conviction with our own mone#% /o repeat afact #ouve heard before, well over 99& of m# net worth resides in "erkshire% Ceitherm# wife nor : have ever sold a share of "erkshire and -- unless our checks stop


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clearing -- we have no intention of doing so%

6lease note that : spoke of hoping to beat the 46 >modestl#%>


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:nvestments ith !ll:ncome

from

Fear 6er 4hare:nvestmentsBcluded

19.9 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%$ +5

$ +%39

19)9 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%5)) 13%)

1989 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%),* 18%8.

1999 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% +),339 '+58%55(

Gere are the growth rates of the two segments b# decade

6re-taB arnings 6er4hare

:nvestments ith !ll :ncomefrom

=ecadending

6er 4hare :nvestmentsBcluded

19)9 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% *9%& 11%5&

1989 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% *8%)& *3%.&

1999 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% *%)& C%!%

!nnual @rowth 7ate, 19.9-1999 %%%%%%%%%%%%%%%%%

*5%+& C%!%

:n 1999, our per-share investments changed ver# little, but our operating earnings,affected b# negatives that overwhelmed some strong positives, fell apart% ;ost of ouroperating managers deserve a grade of ! for delivering fine results and for havingwidened the difference between the intrinsic value of their businesses and the value atwhich these are carried on our balance sheet% "ut, offsetting this, we had a huge --and, : believe, aberrational -- underwriting loss at @eneral 7e% !dditionall#, @:Osunderwriting profit fell, as we had predicted it would% @:Os overall performance,though, was terrific, outstripping m# ambitious goals%

e do not eBpect our underwriting earnings to improve in an# dramatic wa# this#ear% /hough @:Os intrinsic value should grow b# a highl# satisf#ing amount, itsunderwriting performance is almost certain to weaken% /hats because auto insurers,as a group, will do worse in *, and because we will materiall# increase ourmarketing eBpenditures% !t @eneral 7e, we are raising rates and, if there is no mega-catastrophe in *, the compan#s underwriting loss should fall considerabl#% :ttakes some time, however, for the full effect of rate increases to kick in, and @eneral

7e is therefore likel# to have another unsatisfactor# underwriting #ear%


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Fou should be aware that one item regularl# working to widen the amount b#which intrinsic value eBceeds book value is the annual charge against income we take

for amortiEation of goodwill -- an amount now running about $5 million% /hischarge reduces the amount of goodwill we show as an asset and likewise the amountthat is included in our book value% /his is an accounting matter having nothing to dowith true economic goodwill, which increases in most #ears% "ut even if economicgoodwill were to remain constant, the annual amortiEation charge would persistentl#widen the gap between intrinsic value and book value%

/hough we cant give #ou a precise figure for "erkshires intrinsic value, or evenan approBimation, harlie and : can assure #ou that it far eBceeds our $5)%8 billion

book value% "usinesses such as 4ees and "uffalo Cews are now worth fifteen totwent# times the value at which the# are carried on our books% Our goal is to

continuall# widen this spread at all subsidiaries%

A $ana%erial Story Yo" Will Ne&er Read Elsewhere

"erkshires collection of managers is unusual in several important wa#s% !s oneeBample, a ver# high percentage of these men and women are independentl# wealth#,having made fortunes in the businesses that the# run% /he# work neither because the#need the mone# nor because the# are contractuall# obligated to -- we have no

contracts at "erkshire% 7ather, the# work long and hard because the# love theirbusinesses% !nd : use the word >their> advisedl#, since these managers are trul# incharge -- there are no show-and-tell presentations in Omaha, no budgets to beapproved b# head0uarters, no dictums issued about capital eBpenditures% e simpl#ask our managers to run their companies as if these are the sole asset of their familiesand will remain so for the neBt centur#%

harlie and : tr# to behave with our managers 2ust as we attempt to behave with"erkshires shareholders, treating both groups as we would wish to be treated if our

positions were reversed% /hough >working> means nothing to me financiall#, : lovedoing it at "erkshire for some simple reasons :t gives me a sense of achievement, a

freedom to act as : see fit and an opportunit# to interact dail# with people : like andtrust% h# should our managers -- accomplished artists at what the# do -- see thingsdifferentl#H

:n their relations with "erkshire, our managers often appear to be hewing to6resident Ienned#s charge, >!sk not what #our countr# can do for #ouJ ask what#ou can do for #our countr#%> Geres a remarkable stor# from last #ear :ts about 7%% ille#, Ktahs dominant home furnishing business, which "erkshire purchasedfrom "ill hild and his famil# in 1995% "ill and most of his managers are ;ormons,and for this reason 7% % ille#s stores have never operated on 4unda#% /his is adifficult wa# to do business 4unda# is the favorite shopping da# for man# customers%

"ill, nonetheless, stuck to his principles -- and while doing so built his business from


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$*5, of annual sales in 195+, when he took over, to $3+* million in 1999%

"ill felt that 7% % ille# could operate successfull# in markets outside of Ktahand in 199) suggested that we open a store in "oise% : was highl# skeptical about

taking a no-4unda# polic# into a new territor# where we would be up againstentrenched rivals open seven da#s a week% Cevertheless, this was "ills business torun% 4o, despite m# reservations, : told him to follow both his business 2udgment andhis religious convictions%

"ill then insisted on a trul# eBtraordinar# proposition Ge would personall# bu#the land and build the store -- for about $9 million as it turned out -- and would sell itto us at his cost if it proved to be successful% On the other hand, if sales fell short ofhis eBpectations, we could eBit the business without pa#ing "ill a cent% /his outcome,of course, would leave him with a huge investment in an empt# building% : told himthat : appreciated his offer but felt that if "erkshire was going to get the upside it

should also take the downside% "ill said nothing doing :f there was to be failurebecause of his religious beliefs, he wanted to take the blow personall#%

/he store opened last !ugust and immediatel# became a huge success% "illthereupon turned the propert# over to us -- including some eBtra land that hadappreciated significantl# -- and we wrote him a check for his cost% !nd get thisBillrefused to take a dime of interest on the capital he had tied up over the two years %

:f a manager has behaved similarl# at some other public corporation, : havent

heard about it% Fou can understand wh# the opportunit# to partner with people like"ill hild causes me to tap dance to work ever# morning%

! footnote !fter our >soft> opening in !ugust, we had a grand opening of the"oise store about a month later% Caturall#, : went there to cut the ribbon '#ourhairman, : wish to emphasiEe, is good forsomething(% :n m# talk : told the crowdhow sales had far eBceeded eBpectations, making us, b# a considerable margin, the

largest home furnishings store in :daho% /hen, as the speech progressed, m# memor#miraculousl# began to improve% "# the end of m# talk, it all had come back to meOpening a store in "oise had been myidea%

The Econo'ics of (ro)erty*Cas"alty Ins"rance

Our main business -- though we have others of great importance -- is insurance%/o understand "erkshire, therefore, it is necessar# that #ou understand how toevaluate an insurance compan#% /he ke# determinants are '1( the amount of floatthat the business generatesJ '*( its costJ and '3( most critical of all, the long-term


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outlook for both of these factors%

/o begin with, float is mone# we hold but dont own% :n an insurance operation,float arises because premiums are received before losses are paid, an interval that

sometimes eBtends over man# #ears% =uring that time, the insurer invests the mone#%/his pleasant activit# t#picall# carries with it a downside /he premiums that aninsurer takes in usuall# do not cover the losses and eBpenses it eventuall# must pa#%/hat leaves it running an >underwriting loss,> which is the cost of float% !n insurance

business has value if its cost of float over time is less than the cost the compan#would otherwise incur to obtain funds% "ut the business is a lemon if its cost of floatis higher than market rates for mone#%

! caution is appropriate here "ecause loss costs must be estimated, insurers haveenormous latitude in figuring their underwriting results, and that makes it ver#difficult for investors to calculate a compan#s true cost of float% rrors of estimation,

usuall# innocent but sometimes not, can be huge% /he conse0uences of thesemiscalculations flow directl# into earnings% !n eBperienced observer can usuall#detect large-scale errors in reserving, but the general public can t#picall# do no morethan accept whats presented, and at times : have been amaEed b# the numbers that

big-name auditors have implicitl# blessed% :n 1999 a number of insurers announcedreserve ad2ustments that made a mocker# of the >earnings> that investors had reliedon earlier when making their bu# and sell decisions% !t "erkshire, we strive to beconservative and consistent in our reserving% ven so, we warn #ou that an unpleasantsurprise is alwa#s possible%

/he table that follows shows 'at intervals( the float generated b# the varioussegments of "erkshires insurance operations since we entered the business 33 #earsago upon ac0uiring Cational :ndemnit# ompan# 'whose traditional lines areincluded in the segment >Other 6rimar#>(%


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correspondingl# low -- or actuall# had an underwriting profit, which means we werebeingpaidfor holding other peoples mone#% :ndeed, our cumulative result through1998 was an underwriting profit% :n 1999, however, we incurred a $1%+ billionunderwriting loss that left us with float cost of 5%8&% One mildl# mitigating factore enthusiasticall# welcomed $+ million of the loss because it stems from

business that will deliver us eBceptional float over the neBt decade% /he balance of theloss, however, was decidedl# unwelcome, and our overall result must be 2udgedeBtremel# poor% !bsent a mega-catastrophe, we eBpect float cost to fall in *, butan# decline will be tempered b# our aggressive plans for @:O, which we willdiscuss later%

/here are a number of people who deserve credit for manufacturing so much >no-cost> float over the #ears%


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discipline, but we have no doubt that 7on


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industr#wide retention rates are high, toward >standard> and >non-standard>polic#holders for whom retention rates are much lower% '=espite the nomenclature,the three classes have similar profit prospects%( 4econd, retention rates for relativel#new polic#holders are alwa#s lower than those for long-time customers -- and

because of our accelerated growth, our polic#holder ranks now include an increasedproportion of new customers% !d2usted for these two factors, our retention rate haschanged hardl# at all%

e told #ou last #ear that underwriting margins for both @:O and the industr#would fall in 1999, and the# did% e make a similar prediction for *% ! few #earsago margins got too wide, having en2o#ed the effects of an unusual and uneBpecteddecrease in the fre0uenc# and severit# of accidents% /he industr# responded b#reducing rates -- but now is having to contend with an increase in loss costs% ewould not be surprised to see the margins of auto insurers deteriorate b# around three

percentage points in *%

/wo negatives besides worsening fre0uenc# and severit# will hurt the industr# this#ear% seasoned> business, meaning policies that have been with us for more than a #ear%e did outstandingl# well on both fronts during 1999 and therefore made a profit-sharing pa#ment of *8%+& of salar# 'in total, $113%3 million( to the great ma2orit# ofour associates% /on# and : love writing those checks%

!t "erkshire, we want to have compensation policies that are both eas# tounderstand and in s#nc with what we wish our associates to accomplish% riting new

business is eBpensive 'and, as mentioned, getting more eBpensive(% :f we were toinclude those costs in our calculation of bonuses -- as managements did before our

arrival at @:O -- we would be penaliEing our associates for garnering new policies,even though these are ver# much in "erkshires interest% 4o, in effect, we sa# to ourassociates that we will foot the bill for new business% :ndeed, because percentagegrowth in polic#holders is part of our compensation scheme, we rewardourassociates for producing this initiall#-unprofitable business% !nd then we rewardthem additionall# for holding down costs on our seasoned business%

=espite the eBtensive advertising we do, our best source of new business is word-of-mouth recommendations from eBisting polic#holders, who on the whole are

pleased with our prices and service% !n article published last #ear b#Kiplinger'sPersonal FinanceMagazinegives a good picture of where we stand in customer

satisfaction /he magaEines surve# of * state insurance departments showed that


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@:Os complaint ratio was well below the ratio for most of its ma2or competitors%

Our strong referral business means that we probabl# could maintain our polic#count b# spending as little as $5 million annuall# on advertising% /hats a guess, of

course, and we will never know whether it is accurate because /on#s foot is going tosta# on the advertising pedal 'and m# foot will be on his(% Cevertheless, : want toemphasiEe that a ma2or percentage of the $3-$35 million we will spend in * onadvertising, as well as large additional costs we will incur for sales counselors,communications and facilities, are optional outla#s we choose to make so that we can

both achieve significant growth and eBtend and solidif# the promise of the @:Obrand in the minds of !mericans%

6ersonall#, : think these eBpenditures are the best investment "erkshire can make%/hrough its advertising, @:O is ac0uiring a direct relationship with a huge numberof households that, on average, will send us $1,1 #ear after #ear% /hat makes us --

among all companies, selling whatever kind of product -- one of the countr#s leadingdirect merchandisers% !lso, as we build our long-term relationships with more andmore families, cash is pouring in rather than going out 'no :nternet economics here(%?ast #ear, as @:O increased its customer base b# )..,*5., it gained $59 millionof cash from operating earnings and the increase in float%

:n the past three #ears, we have increased our market share in personal autoinsurance from *%)& to +%1&% "ut we rightfull# belong in man# more households --ma#be even #ours% @ive us a call and find out% !bout +& of those people checkingour rates find that the# can save mone# b# doing business with us% /he proportion is

not 1& because insurers differ in their underwriting 2udgments, with some givingmore credit than we do to drivers who live in certain geographic areas or work atcertain occupations% Our closure rate indicates, however, that we more fre0uentl#offer the low price than does an# other national carrier selling insurance to all comers%


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Our two aviation services companies -- D!>( -- are both runawa# leaders in their field% D!, which

sells and manages the fractional ownership of 2et aircraft, through its CetDetsLprogram, is larger than its neBt two competitors combined%


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both subsidiaries of aircraft manufacturers and sell onl# the aircraft their parentsmake% /hough these are fine planes, these competitors are severel# limited in thecabin st#les and mission capabilities the# can offer% D!, in contrast, offers a widearra# of planes from five suppliers% onse0uentl#, we can give the customer whatever

heneeds to bu# -- rather than his getting what the competitors parent needs to sell%

?ast #ear in this report, : described m# famil#s delight with the one-0uarter '*flight hours annuall#( of a Gawker 1 that we had owned since 1995% : got so

pumped up b# m# own prose that shortl# thereafter : signed up for one-siBteenth of aessna A Kltra as well% Cow m# annual outla#s at D! and "orsheims, combined,total ten times m# salar#% /hink of this as a rough guideline for #our owneBpenditures with us%

=uring the past #ear, two of "erkshires outside directors have also signed on withD!% ';a#be were pa#ing them too much%( Fou should be aware that the# and : are

charged eBactl# the same price for planes and service as is an# other customer D!follows a >most favored nations> polic#, with no one getting a special deal%

!nd now, brace #ourself% ?ast #ear, D! passed the ultimate test Charlie signedup.Co other endorsement could speak more elo0uentl# to the value of the D!service% @ive us a call at 1-8-8+8-.+3. and ask for our >white paper> on fractionalownership%

Ac7"isitions of -888

!t both @:O and Becutive Det, our best source of new customers is the happ#ones we alread# have% :ndeed, about .5& of our new owners of aircraft come asreferrals from current owners who have fallen in love with the service%

Our ac0uisitions usuall# develop in the same wa#% !t other companies, eBecutivesma# devote themselves to pursuing ac0uisition possibilities with investment bankers,utiliEing an auction process that has become standardiEed% :n this eBercise the bankers

prepare a >book> that makes me think of the 4uperman comics of m# #outh% :n theall 4treet version, a formerl# mild-mannered compan# emerges from the

investment bankers phone booth able to leap over competitors in a single bound andwith earnings moving faster than a speeding bullet% /itillated b# the booksdescription of the ac0uirees powers, ac0uisition-hungr# Os -- ?ois ?anes all,

beneath their cool eBteriors -- promptl# swoon%

hats particularl# entertaining in these books is the precision with whichearnings are pro2ected for man# #ears ahead% :f #ou ask the author-banker, however,what his own firm will earn net month, he will go into a protective crouch and tell#ou that business and markets are far too uncertain for him to venture a forecast%

Geres one stor# : cant resist relating :n 1985, a ma2or investment banking house

undertook to sell 4cott


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an interest in bu#ing the business% : had never met 7alph, but within a week we had adeal% Knfortunatel#, 4cott

!t "erkshire, our carefull#-crafted ac0uisition strateg# is simpl# to wait for thephone to ring% Gappil#, it sometimes does so, usuall# because a manager who sold tous earlier has recommended to a friend that he think about following suit%

hich brings us to the furniture business% /wo #ears ago : recounted how theac0uisition of Cebraska shoppertainment%> !famil# visiting a store can have a terrific time, while concurrentl# viewing aneBtraordinar# selection of merchandise% /he business results are also eBtraordinar#Dordans has the highest sales per s0uare foot of an# ma2or furniture operation in thecountr#% : urge #ou to visit one of their stores if #ou are in the "oston area --

particularl# the one at Catick, which is Dordans newest% "ring mone#%

"arr# and liot are class# people -- 2ust like their counterparts at "erkshires threeother furniture operations% hen the# sold to us, the# elected to give each of theiremplo#ees at least 5M for ever# hour that he or she had worked for Dordans% /his

pa#ment added up to $9 million, which came from the /atelmans own pockets, notfrom "erkshires% !nd "arr# and liot were thrilled to write the checks%

ach of our furniture operations is number one in its territor#% e now sell morefurniture than an#one else in ;assachusetts, Cew Gampshire, /eBas, Cebraska, Ktahand :daho% ?ast #ear 4tars ;elv#n olff and his sister, 4hirle# /oomim, scored two

ma2or successes a move into 4an !ntonio and a significant enlargement of 4tars


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store in !ustin%

/heres no operation in the furniture retailing business remotel# like the oneassembled b# "erkshire% :ts fun for me and profitable for #ou% % % :t was a woman who drove me to drink, but unfortunatel# : never had thechance to thank her%> : dont want to make that mistake% ;# thanks go to ?ouie, 7onand :rv "lumkin for getting me started in the furniture business and for unerringl#guiding me as we have assembled the group we now have%

Cow, for our second ac0uisition deal :t came to us through m# good friend,alter 4cott, Dr%, chairman of ?evel 3 ommunications and a director of "erkshire%alter has man# other business connections as well, and one of them is with;id!merican nerg#, a utilit# compan# in which he has substantial holdings and onwhose board he sits% !t a conference in alifornia that we both attended last4eptember, alter casuall# asked me whether "erkshire might be interested inmaking a large investment in ;id!merican, and from the start the idea of being in

partnership with alter struck me as a good one% Kpon returning to Omaha, : readsome of ;id!mericans public reports and had two short meetings with alter and=avid 4okol, ;id!mericans talented and entrepreneurial O% : then said that, at anappropriate price, we would indeed like to make a deal%

!c0uisitions in the electric utilit# industr# are complicated b# a variet# of

regulations including the 6ublic Ktilit# Golding ompan# !ct of 1935% /herefore, wehad to structure a transaction that would avoid "erkshire gaining voting control%:nstead we are purchasing an 11& fiBed-income securit#, along with a combination ofcommon stock and eBchangeable preferred that will give "erkshire 2ust under 1& ofthe voting power of ;id!merican but about ).& of the e0uit# interest% !ll told, ourinvestment will be about $* billion%

alter characteristicall# backed up his convictions with real mone# Ge and hisfamil# will bu# more ;id!merican stock for cash when the transaction closes,

bringing their total investment to about $*8 million% alter will also be thecontrolling shareholder of the compan#, and : cant think of a better person to hold

that post%

/hough there are man# regulator# constraints in the utilit# industr#, its possiblethat we will make additional commitments in the field% :f we do, the amountsinvolved could be large%

Ac7"isition Acco"ntin%

Once again, : would like to make some comments about accounting, in this caseabout its application to ac0uisitions% /his is currentl# a ver# contentious topic and,

before the dust settles, ongress ma# even intervene 'a trul# terrible idea(%


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hen a compan# is ac0uired, generall# accepted accounting principles '>@!!6>(currentl# condone two ver# different wa#s of recording the transaction >purchase>and >pooling%> :n a pooling, stock must be the currenc#J in a purchase, pa#ment can

be made in either cash or stock% hatever the currenc#, managements usuall# detest

purchase accounting because it almost alwa#s re0uires that a >goodwill> account beestablished and subse0uentl# written off -- a process that saddles earnings with alarge annual charge that normall# persists for decades% :n contrast, pooling avoids agoodwill account, which is wh# managements love it%

Cow, the ( has proposed an end topooling, and man# Os are girding for battle% :t will be an important fight, so wellventure some opinions% /o begin with, we agree with the man# managers who arguethat goodwill amortiEation charges are usuall# spurious% Foull find m# thinkingabout this in the appendiB to our 1983 annual report, which is available on ourwebsite, and in the Owners ;anual on pages 55 - .*%

purchased> 'even though itwill often have received a large >sell-out> premium(% onse0uentl#, no goodwill iscreated, and those pesk# subse0uent charges to earnings are eliminated% :nstead, theaccounting for the ongoing entit# is handled as if the businesses had forever been oneunit%

4o much for poetr#% /he realit# of merging is usuall# far different /here isindisputabl# an ac0uirer and an ac0uiree, and the latter has been >purchased,> nomatter how the deal has been structured% :f #ou think otherwise, 2ust ask emplo#eessevered from their 2obs which compan# was the con0ueror and which was the

con0uered% Fou will find no confusion% 4o on this point the


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the# are few and far between%

harlie and : believe theres a realit#-based approach that should both satisf# the

increases the amount of cash delivered b# the business% :n contrast, when stock, ratherthan assets, is purchased for cash, the resulting writeoffs of goodwill are not taB-deductible% /he economic difference between these two approaches is substantial%


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of presentation seems to us to be more useful to investors and managers than oneutiliEing generall# accepted accounting principles '@!!6(, which re0uire purchase-

premiums to be charged off business-b#-business% /he total earnings we show in thetable are, of course, identical to the @!!6 total in our audited financial statements%

!in millions"

Berkshire's #hare

of $et %arnings

!after taes and

Pre&a %arnings minorityinterests"

())) ())* ())) ())*

Operating arnings

:nsurance @roup

Knderwriting --7einsurance %%%%%%%%%%%%%%%%%%%%

$'1,++( $'*1( $'9*)( $'1+(

Knderwriting --@:O %%%%%%%%%%%%%%%%%%%%%%%%%%

*+ *.9 1. 1)5

Knderwriting -- Other6rimar# %%%%%%%%%%%%%%%%%

** 1) 1+ 1

Cet :nvestment:ncome %%%%%%%%%%%%%%%%%%%%%%%%%%%%

*,+8* 9)+ 1,).+ )31

"uffaloCews %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

55 53 3+ 3*


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Other %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

33 . '+( * +5 '+(

Operatingarnings %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

1,85 1,899 .)1 1,*))

apital @ains from

:nvestments %%%%%%%%%%%%%%%%%

1,3.5 *,+15 88. 1,553

/otal arnings - !llntities %%%%%%%%%%%%%%%%%%%%%%%

$*,+5 $+,31+ $1,55) $*,83

!("+ncludes %ecutive ,et from -ugust /

())*.

!0"%cludes interest epense of Finance

Businesses.

!1"+ncludes ,ordan's Furniture from

$ovem2er (0/ ())).

!3"+ncludes 4eneral 5e operations for ten

days in ())*.

!lmost all of our manufacturing, retailing and service businesses had eBcellentresults in 1999% /he eBception was =eBter 4hoe, and there the shortfall did not occur

because of managerial problems :n skills, energ# and devotion to their work, the=eBter eBecutives are ever# bit the e0ual of our other managers% "ut we manufactureshoes primaril# in the K%4%, and it has become eBtremel# difficult for domestic

producers to compete effectivel#% :n 1999, approBimatel# 93& of the 1%3 billion pairsof shoes purchased in this countr# came from abroad, where eBtremel# low-cost labor

is the rule%

ounting both =eBter and G% G% "rown, we are currentl# the leading domesticmanufacturer of shoes, and we are likel# to continue to be% e have lo#al, highl#-skilled workers in our K%4% plants, and we want to retain ever# 2ob here that we can%

Cevertheless, in order to remain viable, we are sourcing more of our outputinternationall#% :n doing that, we have incurred significant severance and relocationcosts that are included in the earnings we show in the table%

! few #ears back, GelEbergs, our *-store 2ewelr# operation, needed to makeoperating ad2ustments to restore margins to appropriate levels% Knder Deff omments

leadership, the 2ob was done and profits have dramaticall# rebounded% :n the shoebusiness, where we have Garold !lfond, 6eter ?under,


19/27

compan#s pre-taB profit, eBpressed in millions, was about 1& of his age% /oda# hes)+, and the ratio has increased to 1&% Gaving discovered this mathematicalrelationship -- lets call it Guggins ?aw -- harlie and : now become gidd# at themere thought of hucks birthda#%

!dditional information about our various businesses is given on pages 39 - 5+,where #ou will also find our segment earnings reported on a @!!6 basis% :n addition,on pages .3 - .9, we have rearranged "erkshires financial data into four segments ona non-@!!6 basis, a presentation that corresponds to the wa# harlie and : thinkabout the compan#%

9ookThro"%h Earnin%s

7eported earnings are an inade0uate measure of economic progress at "erkshire,in part because the numbers shown in the table presented earlier include onl# thedividends we receive from investees -- though these dividends t#picall# representonl# a small fraction of the earnings attributable to our ownership% Cot that we mindthis division of mone#, since on balance we regard the undistributed earnings ofinvestees as more valuable to us than the portion paid out% /he reason for our thinkingis simple Our investees often have the opportunit# to reinvest earnings at high ratesof return% 4o wh# should we want them paid outH

/o depict something closer to economic realit# at "erkshire than reportedearnings, though, we emplo# the concept of >look-through> earnings% !s we calculatethese, the# consist of '1( the operating earnings reported in the previous section, plusJ'*( our share of the retained operating earnings of ma2or investees that, under @!!6accounting, are not reflected in our profits, lessJ '3( an allowance for the taB thatwould be paid b# "erkshire if these retained earnings of investees had instead beendistributed to us% hen tabulating >operating earnings> here, we eBclude purchase-accounting ad2ustments as well as capital gains and other ma2or non-recurring items%

/he following table sets forth our 1999 look-through earnings, though : warn #outhat the figures can be no more than approBimate, since the# are based on a number of

2udgment calls% '/he dividends paid to us b# these investees have been included in theoperating earnings itemiEed on page 13, mostl# under >:nsurance @roup Cet:nvestment :ncome%>(

"erkshires!pproBimate

"erkshires 4hare ofKndistributed

"erkshires ;a2or :nvestees Ownership at

Fearend'1(Operating arnings 'in

millions('*(


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!merican Bpressompan# %%%%%%%%%%%

11%3& $**8

/he oca-olaompan# %%%%%%%%%%%%%%%

8%1& 1++


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/otal ommon 4tocks %%%%%%%%%%%%% $8,*3 $3),8

7epresents taB-basis cost which, in aggregate, is $.91 million less than@!!6 cost%

e made few portfolio changes in 1999% !s : mentioned earlier, several of thecompanies in which we have large investments had disappointing business results last#ear% Cevertheless, we believe these companies have important competitiveadvantages that will endure over time% /his attribute, which makes for good long-terminvestment results, is one harlie and : occasionall# believe we can identif#% ;oreoften, however, we cant -- not at least with a high degree of conviction% /his eBplains,

b# the wa#, wh# we dont own stocks of tech companies, even though we share thegeneral view that our societ# will be transformed b# their products and services% Our

problem -- which we cant solve b# stud#ing up -- is that we have no insights intowhich participants in the tech field possess a trul# dura2lecompetitive advantage%

Our lack of tech insights, we should add, does not distress us% !fter all, there are agreat man# business areas in which harlie and : have no special capital-allocationeBpertise%


22/27

the accurac# of *&% Gowever, its the markets view /reasur# :nflation-6rotected4ecurities '/:64( #ield about two percentage points less than the standard treasur#

bond, and if #ou believe inflation rates are going to be higher than that, #ou can profitb# simpl# bu#ing /:64 and shorting @overnments%

:f profits do indeed grow along with @=6, at about a 5& rate, the valuation placedon !merican business is unlikel# to climb b# much more than that% !dd in somethingfor dividends, and #ou emerge with returns from e0uities that are dramaticall# lessthan most investors have either eBperienced in the past or eBpect in the future% :finvestor eBpectations become more realistic -- and the# almost certainl# will -- themarket ad2ustment is apt to be severe, particularl# in sectors in which speculation has

been concentrated%

"erkshire will someda# have opportunities to deplo# ma2or amounts of cash ine0uit# markets -- we are confident of that% "ut, as the song goes, >ho knows where

or whenH> ;eanwhile, if an#one starts eBplaining to #ou what is going on in the trul#-manic portions of this >enchanted> market, #ou might remember still another line ofsong >

Share Re)"rchases

7ecentl#, a number of shareholders have suggested to us that "erkshire repurchaseits shares% Ksuall# the re0uests were rationall# based, but a few leaned on spuriouslogic%

/here is onl# one combination of facts that makes it advisable for a compan# torepurchase its shares needs> that : speak of are of two kinds


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the 19)s 'and, spasmodicall#, for some #ears thereafter( we searched for companiesthat were large repurchasers of their shares% /his often was a tipoff that the compan#was both undervalued and run b# a shareholder-oriented management%

/hat da# is past% Cow, repurchases are all the rage, but are all too often made foran unstated and, in our view, ignoble reason to pump or support the stock price% /heshareholder who chooses to sell toda#, of course, is benefitted b# an# bu#er, whateverhis origin or motives% "ut the continuingshareholder is penaliEed b# repurchasesabove intrinsic value% "u#ing dollar bills for $1%1 is not good business for those whostick around%

harlie and : admit that we feel confident in estimating intrinsic value for onl# aportion of traded e0uities and then onl# when we emplo# a range of values, ratherthan some pseudo-precise figure% Cevertheless, it appears to us that man# companiesnow making repurchases are overpa#ing departing shareholders at the eBpense of

those who sta#% :n defense of those companies, : would sa# that it is natural for Osto be optimistic about their own businesses% /he# also know a whole lot more aboutthem than : do% Gowever, : cant help but feel that too often toda#s repurchases aredictated b# managements desire to >show confidence> or be in fashion rather than b#a desire to enhance per-share value%

4ometimes, too, companies sa# the# are repurchasing shares to offset the sharesissued when stock options granted at much lower prices are eBercised% /his >bu# high,sell low> strateg# is one man# unfortunate investors have emplo#ed -- but neverintentionall#P ;anagements, however, seem to follow this perverse activit# ver#cheerfull#%

Of course, both option grants and repurchases ma# make sense -- but if thats thecase, its not because the two activities are logicall# related% 7ationall#, a compan#sdecision to repurchase shares or to issue them should stand on its own feet% Dust

because stock has been issued to satisf# options -- or for an# other reason -- does notmean that stock should be repurchased at a price above intrinsic value%orrespondingl#, a stock that sells well below intrinsic value should be repurchasedwhether or not stock has previousl# been issued 'or ma# be because of outstandingoptions(%

Fou should be aware that, at certain times in the past, : have erred in notmakingrepurchases% ;# appraisal of "erkshires value was then too conservative or : was tooenthused about some alternative use of funds% e have therefore missed someopportunities -- though "erkshires trading volume at these points was too light for usto have done much bu#ing, which means that the gain in our per-share value wouldhave been minimal% '! repurchase of, sa#, *& of a compan#s shares at a *5&discount from per-share intrinsic value produces onl# a Q& gain in that value at most-- and even less if the funds could alternativel# have been deplo#ed in value-buildingmoves%(

4ome of the letters weve received clearl# impl# that the writer is unconcerned

about intrinsic value considerations but instead wants us to trumpet an intention torepurchase so that the stock will rise 'or 0uit going down(% :f the writer wants to sell


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tomorrow, his thinking makes sense -- for himP -- but if he intends to hold, he shouldinstead hope the stock falls and trades in enough volume for us to bu# a lot of it%/hats the onl# wa# a repurchase program can have an# real benefit for a continuingshareholder%

e will not repurchase shares unless we believe "erkshire stock is selling wellbelow intrinsic value, conservativel# calculated% Cor will we attempt to talk the stockup or down% 'Ceither publicl# or privatel# have : ever told an#one to bu# or sell"erkshire shares%( :nstead we will give all shareholders -- and potential shareholders-- the same valuation-related information we would wish to have if our positions werereversed%

7ecentl#, when the ! shares fell below $+5,, we considered makingrepurchases% e decided, however, to dela# bu#ing, if indeed we elect to do any, untilshareholders have had the chance to review this report% :f we do find that repurchases

make sense, we will onl# rarel# place bids on the Cew Fork 4tock Bchange'>CF4>(% :nstead, we will respond to offers made directl# to us at or below the

CF4 bid% :f #ou wish to offer stock, have #our broker call ;ark ;illard at +*-3+.-1+% hen a trade occurs, the broker can either record it in the >third market> or onthe CF4% e will favor purchase of the " shares if the# are selling at more than a*& discount to the !% e will not engage in transactions involving fewer than 1shares of ! or 5 shares of "%

6lease be clear about one point e will nevermake purchases with the intentionof stemming a decline in "erkshires price% 7ather we will make them if and when we

believe that the# represent an attractive use of the ompan#s mone#% !t best,repurchases are likel# to have onl# a ver# minor effect on the future rate of gain in ourstocks intrinsic value%

Shareholder:esi%nated Contri;"tions

!bout 9)%3& of all eligible shares participated in "erkshires 1999 shareholder-designated contributions program, with contributions totaling $1)%* million% ! fulldescription of the program appears on pages ) - )1%

umulativel#, over the 19 #ears of the program, "erkshire has made contributions

of $1+) million pursuant to the instructions of our shareholders% /he rest of"erkshires giving is done b# our subsidiaries, which stick to the philanthropic

patterns that prevailed before the# were ac0uired 'eBcept that their former ownersthemselves take on the responsibilit# for their personal charities(% :n aggregate, oursubsidiaries made contributions of $13%8 million in 1999, including in-kind donationsof $*%5 million%

o participate in future programs/ you must own Class - shares that are

registered in the name of the actual owner/ not the nominee name of a 2roker/ 2ank

or depository. #hares not so registered on -ugust 0(/ 1888/ will 2e ineligi2le for the

1888 program. 9hen you get the contri2utions form from us/ return it promptly so

that it does not get put aside or forgotten. :esignations received after the due datewill not 2e honored.


25/27

The Ann"al $eetin%

/his #ears oodstock eekend for apitalists will follow a format slightl#different from that of recent #ears% e need to make a change because the !ksarbenoliseum, which served us well the past three #ears, is graduall# being closed down%/herefore, we are relocating to the ivic !uditorium 'which is on apitol !venue

between 18thand 19th, behind the =oubletree Gotel(, the onl# other facilit# in Omahaoffering the space we re0uire%

/he ivic, however, is located in downtown Omaha, and we would create aparking and traffic nightmare if we were to meet there on a weekda#% e will,therefore, convene on 4aturda#, !pril *9, with the doors opening at ) a%m%, the movie

beginning at 83 and the meeting itself commencing at 93% !s in the past, we willrun until 33 with a short break at noon for food, which will be available at theivics concession stands%

!n attachment to the proB# material that is enclosed with this report eBplains how#ou can obtain the credential #ou will need for admission to the meeting and otherevents% !s for plane, hotel and car reservations, we have again signed up !mericanBpress '8-)99-..3+( to give #ou special help% :n our normal fashion, we will run

buses from the larger hotels to the meeting% !fter the meeting, the buses will maketrips back to the hotels and to Cebraska


26/27

out whether we can save #ou some mone#%


27/27

/he usual baseball game will be held at 7osenblatt 4tadium at ) p%m% on 4aturda#night% /his #ear the Omaha @olden 4pikes will pla# the :owa ubs% ome earl#,

because thats when the real action takes place% /hose who attended last #ear saw #ourhairman pitch to rnie "anks%

/his encounter proved to be the titanic duel that the sports world had long awaited%!fter the first few pitches -- which were not m# best, but when have : ever thrown m#

bestH -- : fired a brushback at rnie 2ust to let him know who was in command% rniecharged the mound, and : charged the plate% "ut a clash was avoided because we

became eBhausted before reaching each other%

rnie was dissatisfied with his performance last #ear and has been stud#ing thegame films all winter% !s #ou ma# know, rnie had 51* home runs in his career as aub% Cow that he has spotted telltale weaknesses in m# deliver#, he eBpects to getR513 on !pril *9% :, however, have learned new wa#s to disguise m# >flutterball%>

ome and watch this matchup%

: should add that : have eBtracted a promise from rnie that he will not hit a>come-backer> at me since : would never be able to duck in time to avoid it% ;#refleBes are like ood# !llens, who said his were so slow that he was once hit b# acar being pushed b# two gu#s%

Our proB# statement contains instructions about obtaining tickets to the game andalso a large 0uantit# of other information that should help #ou en2o# #our visit inOmaha% Doin us at the apitalist aper on apitol !venue%

;arch 1, *arren % "uffetthairman of the "oard

warren buffet 1999 shareholder letter

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