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BERKSHIREHATHAWAYINC.

TotheShareholdersofBerkshireHathawayInc.:
Thispastyearourregisteredshareholdersincreasedfrom
about1900toabout2900.Mostofthisgrowthresultedfromour
mergerwithBlueChipStamps,buttherealsowasanacceleration
inthepaceofnaturalincreasethathasraisedusfromthe
1000levelafewyearsago.
Withsomanynewshareholders,itsappropriatetosummarize
themajorbusinessprincipleswefollowthatpertaintothe
managerownerrelationship:
oAlthoughourformiscorporate,ourattitudeis
partnership.CharlieMungerandIthinkofourshareholdersas
ownerpartners,andofourselvesasmanagingpartners.(Because
ofthesizeofourshareholdingswealsoare,forbetteror
worse,controllingpartners.)Wedonotviewthecompanyitself
astheultimateownerofourbusinessassetsbut,instead,view
thecompanyasaconduitthroughwhichourshareholdersownthe
assets.
oInlinewiththisownerorientation,ourdirectorsareall
majorshareholdersofBerkshireHathaway.Inthecaseofat
leastfourofthefive,over50%offamilynetworthis
representedbyholdingsofBerkshire.Weeatourowncooking.
oOurlongtermeconomicgoal(subjecttosomequalifications
mentionedlater)istomaximizetheaverageannualrateofgain
inintrinsicbusinessvalueonapersharebasis.Wedonot
measuretheeconomicsignificanceorperformanceofBerkshireby
itssize;wemeasurebypershareprogress.Wearecertainthat
therateofpershareprogresswilldiminishinthefuturea
greatlyenlargedcapitalbasewillseetothat.Butwewillbe
disappointedifourratedoesnotexceedthatoftheaverage
largeAmericancorporation.
oOurpreferencewouldbetoreachthisgoalbydirectly
owningadiversifiedgroupofbusinessesthatgeneratecashand
consistentlyearnaboveaveragereturnsoncapital.Oursecond
choiceistoownpartsofsimilarbusinesses,attainedprimarily
throughpurchasesofmarketablecommonstocksbyourinsurance
subsidiaries.Thepriceandavailabilityofbusinessesandthe
needforinsurancecapitaldetermineanygivenyearscapital
allocation.
oBecauseofthistwoprongedapproachtobusinessownership
andbecauseofthelimitationsofconventionalaccounting,
consolidatedreportedearningsmayrevealrelativelylittleabout
ourtrueeconomicperformance.CharlieandI,bothasownersand
managers,virtuallyignoresuchconsolidatednumbers.However,
wewillalsoreporttoyoutheearningsofeachmajorbusinesswe
control,numbersweconsiderofgreatimportance.Thesefigures,
alongwithotherinformationwewillsupplyabouttheindividual
businesses,shouldgenerallyaidyouinmakingjudgmentsabout
them.

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oAccountingconsequencesdonotinfluenceouroperatingor
capitalallocationdecisions.Whenacquisitioncostsare
similar,wemuchprefertopurchase$2ofearningsthatisnot
reportablebyusunderstandardaccountingprinciplesthanto
purchase$1ofearningsthatisreportable.Thisisprecisely
thechoicethatoftenfacesussinceentirebusinesses(whose
earningswillbefullyreportable)frequentlysellfordoublethe
proratapriceofsmallportions(whoseearningswillbelargely
unreportable).Inaggregateandovertime,weexpectthe
unreportedearningstobefullyreflectedinourintrinsic
businessvaluethroughcapitalgains.
oWerarelyusemuchdebtand,whenwedo,weattemptto
structureitonalongtermfixedratebasis.Wewillreject
interestingopportunitiesratherthanoverleverageourbalance
sheet.Thisconservatismhaspenalizedourresultsbutitisthe
onlybehaviorthatleavesuscomfortable,consideringour
fiduciaryobligationstopolicyholders,depositors,lendersand
themanyequityholderswhohavecommittedunusuallylarge
portionsoftheirnetworthtoourcare.
oAmanagerialwishlistwillnotbefilledatshareholder
expense.Wewillnotdiversifybypurchasingentirebusinesses
atcontrolpricesthatignorelongtermeconomicconsequencesto
ourshareholders.Wewillonlydowithyourmoneywhatwewould
dowithourown,weighingfullythevaluesyoucanobtainby
diversifyingyourownportfoliosthroughdirectpurchasesinthe
stockmarket.
oWefeelnobleintentionsshouldbecheckedperiodically
againstresults.Wetestthewisdomofretainingearningsby
assessingwhetherretention,overtime,deliversshareholdersat
least$1ofmarketvalueforeach$1retained.Todate,this
testhasbeenmet.Wewillcontinuetoapplyitonafiveyear
rollingbasis.Asournetworthgrows,itismoredifficultto
useretainedearningswisely.
oWewillissuecommonstockonlywhenwereceiveasmuchin
businessvalueaswegive.Thisruleappliestoallformsof
issuancenotonlymergersorpublicstockofferings,butstock
fordebtswaps,stockoptions,andconvertiblesecuritiesas
well.Wewillnotsellsmallportionsofyourcompanyandthat
iswhattheissuanceofsharesamountstoonabasis
inconsistentwiththevalueoftheentireenterprise.
oYoushouldbefullyawareofoneattitudeCharlieandI
sharethathurtsourfinancialperformance:regardlessofprice,
wehavenointerestatallinsellinganygoodbusinessesthat
Berkshireowns,andareveryreluctanttosellsubparbusinesses
aslongasweexpectthemtogenerateatleastsomecashandas
longaswefeelgoodabouttheirmanagersandlaborrelations.
Wehopenottorepeatthecapitalallocationmistakesthatledus
intosuchsubparbusinesses.Andwereactwithgreatcautionto
suggestionsthatourpoorbusinessescanberestoredto
satisfactoryprofitabilitybymajorcapitalexpenditures.(The
projectionswillbedazzlingtheadvocateswillbesincere
but,intheend,majoradditionalinvestmentinaterrible
industryusuallyisaboutasrewardingasstrugglingin
quicksand.)Nevertheless,ginrummymanagerialbehavior(discard
yourleastpromisingbusinessateachturn)isnotourstyle.We
wouldratherhaveouroverallresultspenalizedabitthanengage
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init.
oWewillbecandidinourreportingtoyou,emphasizingthe
plusesandminusesimportantinappraisingbusinessvalue.Our
guidelineistotellyouthebusinessfactsthatwewouldwantto
knowifourpositionswerereversed.Weoweyounoless.
Moreover,asacompanywithamajorcommunicationsbusiness,it
wouldbeinexcusableforustoapplylesserstandardsof
accuracy,balanceandincisivenesswhenreportingonourselves
thanwewouldexpectournewspeopletoapplywhenreportingon
others.Wealsobelievecandorbenefitsusasmanagers:theCEO
whomisleadsothersinpublicmayeventuallymisleadhimselfin
private.
oDespiteourpolicyofcandor,wewilldiscussour
activitiesinmarketablesecuritiesonlytotheextentlegally
required.Goodinvestmentideasarerare,valuableandsubject
tocompetitiveappropriationjustasgoodproductorbusiness
acquisitionideasare.Therefore,wenormallywillnottalk
aboutourinvestmentideas.Thisbanextendseventosecurities
wehavesold(becausewemaypurchasethemagain)andtostocks
weareincorrectlyrumoredtobebuying.Ifwedenythose
reportsbutsaynocommentonotheroccasions,thenocomments
becomeconfirmation.
Thatcompletesthecatechism,andwecannowmoveontothe
highpointof1983theacquisitionofamajorityinterestin
NebraskaFurnitureMartandourassociationwithRoseBlumkinand
herfamily.
NebraskaFurnitureMart
Lastyear,indiscussinghowmanagerswithbright,but
adrenalinsoakedmindsscrambleafterfoolishacquisitions,I
quotedPascal:Ithasstruckmethatallthemisfortunesofmen
springfromthesinglecausethattheyareunabletostayquietly
inoneroom.
EvenPascalwouldhavelefttheroomforMrs.Blumkin.
About67yearsagoMrs.Blumkin,then23,talkedherway
pastaborderguardtoleaveRussiaforAmerica.Shehadno
formaleducation,notevenatthegrammarschoollevel,andknew
noEnglish.Aftersomeyearsinthiscountry,shelearnedthe
languagewhenherolderdaughtertaughther,everyevening,the
wordsshehadlearnedinschoolduringtheday.
In1937,aftermanyyearsofsellingusedclothing,Mrs.
Blumkinhadsaved$500withwhichtorealizeherdreamofopening
afurniturestore.UponseeingtheAmericanFurnitureMartin
Chicagothenthecenterofthenationswholesalefurniture
activityshedecidedtochristenherdreamNebraskaFurniture
Mart.
Shemeteveryobstacleyouwouldexpect(andafewyou
wouldnt)whenabusinessendowedwithonly$500andno
locationalorproductadvantagegoesupagainstrich,long
entrenchedcompetition.Atoneearlypoint,whenhertiny
resourcesranout,Mrs.B(apersonaltrademarknowaswell
recognizedinGreaterOmahaasCocaColaorSanka)copedinaway
nottaughtatbusinessschools:shesimplysoldthefurnitureand
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appliancesfromherhomeinordertopaycreditorspreciselyas
promised.
OmaharetailersbegantorecognizethatMrs.Bwouldoffer
customersfarbetterdealsthantheyhadbeengiving,andthey
pressuredfurnitureandcarpetmanufacturersnottoselltoher.
Butbyvariousstrategiessheobtainedmerchandiseandcutprices
sharply.Mrs.BwasthenhauledintocourtforviolationofFair
Tradelaws.Shenotonlywonallthecases,butreceived
invaluablepublicity.Attheendofonecase,after
demonstratingtothecourtthatshecouldprofitablysellcarpet
atahugediscountfromtheprevailingprice,shesoldthejudge
$1400worthofcarpet.
TodayNebraskaFurnitureMartgeneratesover$100millionof
salesannuallyoutofone200,000squarefootstore.Noother
homefurnishingsstoreinthecountrycomesclosetothatvolume.
Thatsinglestorealsosellsmorefurniture,carpets,and
appliancesthandoallOmahacompetitorscombined.
OnequestionIalwaysaskmyselfinappraisingabusinessis
howIwouldlike,assumingIhadamplecapitalandskilled
personnel,tocompetewithit.Idratherwrestlegrizzliesthan
competewithMrs.Bandherprogeny.Theybuybrilliantly,they
operateatexpenseratioscompetitorsdontevendreamabout,and
theythenpassontotheircustomersmuchofthesavings.Its
theidealbusinessonebuiltuponexceptionalvaluetothe
customerthatinturntranslatesintoexceptionaleconomicsfor
itsowners.
Mrs.Biswiseaswellassmartand,forfarsightedfamily
reasons,waswillingtosellthebusinesslastyear.Ihad
admiredboththefamilyandthebusinessfordecades,andadeal
wasquicklymade.ButMrs.B,now90,isnotonetogohomeand
risk,assheputsit,losinghermarbles.SheremainsChairman
andisonthesalesfloorsevendaysaweek.Carpetsalesare
herspecialty.Shepersonallysellsquantitiesthatwouldbea
gooddepartmentaltotalforothercarpetretailers.
Wepurchased90%ofthebusinessleaving10%withmembers
ofthefamilywhoareinvolvedinmanagementandhaveoptioned
10%tocertainkeyyoungfamilymanagers.
Andwhatmanagerstheyare.Geneticistsshoulddo
handspringsovertheBlumkinfamily.LouieBlumkin,Mrs.Bs
son,hasbeenPresidentofNebraskaFurnitureMartformanyyears
andiswidelyregardedastheshrewdestbuyeroffurnitureand
appliancesinthecountry.Louiesayshehadthebestteacher,
andMrs.Bsaysshehadthebeststudent.Theyrebothright.
LouieandhisthreesonsallhavetheBlumkinbusinessability,
workethic,and,mostimportant,character.Ontopofthat,they
arereallynicepeople.Wearedelightedtobeinpartnership
withthem.
CorporatePerformance
During1983ourbookvalueincreasedfrom$737.43pershare
to$975.83pershare,orby32%.Wenevertaketheoneyear
figureveryseriously.Afterall,whyshouldthetimerequired
foraplanettocirclethesunsynchronizepreciselywiththe
timerequiredforbusinessactionstopayoff?Instead,we
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recommendnotlessthanafiveyeartestasaroughyardstickof
economicperformance.Redlightsshouldstartflashingifthe
fiveyearaverageannualgainfallsmuchbelowthereturnon
equityearnedovertheperiodbyAmericanindustryinaggregate.
(WatchoutforourexplanationifthatoccursasGoetheobserved,
Whenideasfail,wordscomeinveryhandy.)
Duringthe19yeartenureofpresentmanagement,bookvalue
hasgrownfrom$19.46pershareto$975.83,or22.6%compounded
annually.Consideringourpresentsize,nothingclosetothis
rateofreturncanbesustained.Thosewhobelieveotherwise
shouldpursueacareerinsales,butavoidoneinmathematics.
Wereportourprogressintermsofbookvaluebecauseinour
case(thoughnot,byanymeans,inallcases)itisa
conservativebutreasonablyadequateproxyforgrowthin
intrinsicbusinessvaluethemeasurementthatreallycounts.
Bookvaluesvirtueasascorekeepingmeasureisthatitiseasy
tocalculateanddoesntinvolvethesubjective(butimportant)
judgmentsemployedincalculationofintrinsicbusinessvalue.
Itisimportanttounderstand,however,thatthetwotermsbook
valueandintrinsicbusinessvaluehaveverydifferent
meanings.
Bookvalueisanaccountingconcept,recordingthe
accumulatedfinancialinputfrombothcontributedcapitaland
retainedearnings.Intrinsicbusinessvalueisaneconomic
concept,estimatingfuturecashoutputdiscountedtopresent
value.Bookvaluetellsyouwhathasbeenputin;intrinsic
businessvalueestimateswhatcanbetakenout.
Ananalogywillsuggestthedifference.Assumeyouspend
identicalamountsputtingeachoftwochildrenthroughcollege.
Thebookvalue(measuredbyfinancialinput)ofeachchilds
educationwouldbethesame.Butthepresentvalueofthefuture
payoff(theintrinsicbusinessvalue)mightvaryenormously
fromzerotomanytimesthecostoftheeducation.So,also,do
businesseshavingequalfinancialinputendupwithwide
variationsinvalue.
AtBerkshire,atthebeginningoffiscal1965whenthe
presentmanagementtookover,the$19.46persharebookvalue
considerablyoverstatedintrinsicbusinessvalue.Allofthat
bookvalueconsistedoftextileassetsthatcouldnotearn,on
average,anythingclosetoanappropriaterateofreturn.Inthe
termsofouranalogy,theinvestmentintextileassetsresembled
investmentinalargelywastededucation.
Now,however,ourintrinsicbusinessvalueconsiderably
exceedsbookvalue.Therearetwomajorreasons:
(1)Standardaccountingprinciplesrequirethatcommon
stocksheldbyourinsurancesubsidiariesbestatedon
ourbooksatmarketvalue,butthatotherstocksweown
becarriedatthelowerofaggregatecostormarket.
Attheendof1983,themarketvalueofthislatter
groupexceededcarryingvalueby$70millionpretax,
orabout$50millionaftertax.Thisexcessbelongsin
ourintrinsicbusinessvalue,butisnotincludedin
thecalculationofbookvalue;
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(2)Moreimportant,weownseveralbusinessesthatpossess
economicGoodwill(whichisproperlyincludablein
intrinsicbusinessvalue)farlargerthanthe
accountingGoodwillthatiscarriedonourbalance
sheetandreflectedinbookvalue.
Goodwill,botheconomicandaccounting,isanarcanesubject
andrequiresmoreexplanationthanisappropriatehere.The
appendixthatfollowsthisletterGoodwillandits
Amortization:TheRulesandTheRealitiesexplainswhy
economicandaccountingGoodwillcan,andusuallydo,differ
enormously.
Youcanliveafullandrewardinglifewithouteverthinking
aboutGoodwillanditsamortization.Butstudentsofinvestment
andmanagementshouldunderstandthenuancesofthesubject.My
ownthinkinghaschangeddrasticallyfrom35yearsagowhenIwas
taughttofavortangibleassetsandtoshunbusinesseswhose
valuedependedlargelyuponeconomicGoodwill.Thisbiascaused
metomakemanyimportantbusinessmistakesofomission,although
relativelyfewofcommission.
Keynesidentifiedmyproblem:Thedifficultyliesnotin
thenewideasbutinescapingfromtheoldones.Myescapewas
longdelayed,inpartbecausemostofwhatIhadbeentaughtby
thesameteacherhadbeen(andcontinuestobe)so
extraordinarilyvaluable.Ultimately,businessexperience,
directandvicarious,producedmypresentstrongpreferencefor
businessesthatpossesslargeamountsofenduringGoodwilland
thatutilizeaminimumoftangibleassets.
IrecommendtheAppendixtothosewhoarecomfortablewith
accountingterminologyandwhohaveaninterestinunderstanding
thebusinessaspectsofGoodwill.Whetherornotyouwishto
tackletheAppendix,youshouldbeawarethatCharlieandI
believethatBerkshirepossessesverysignificanteconomic
Goodwillvalueabovethatreflectedinourbookvalue.
SourcesofReportedEarnings
ThetablebelowshowsthesourcesofBerkshiresreported
earnings.In1982,Berkshireownedabout60%ofBlueChipStamps
whereas,in1983,ourownershipwas60%throughoutthefirstsix
monthsand100%thereafter.Inturn,Berkshiresnetinterestin
Wescowas48%during1982andthefirstsixmonthsof1983,and
80%forthebalanceof1983.Becauseofthesechangedownership
percentages,thefirsttwocolumnsofthetableprovidethebest
measureofunderlyingbusinessperformance.
Allofthesignificantgainsandlossesattributableto
unusualsalesofassetsbyanyofthebusinessentitiesare
aggregatedwithsecuritiestransactionsonthelinenearthe
bottomofthetable,andarenotincludedinoperatingearnings.
(Weregardanyannualfigureforrealizedcapitalgainsorlosses
asmeaningless,butweregardtheaggregaterealizedand
unrealizedcapitalgainsoveraperiodofyearsasvery
important.)Furthermore,amortizationofGoodwillisnotcharged
againstthespecificbusinessesbut,forreasonsoutlinedinthe
Appendix,issetforthasaseparateitem.
NetEarnings
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EarningsBeforeIncomeTaxesAfterTax

TotalBerkshireShareBerkshireShare

198319821983198219831982

(000somitted)
OperatingEarnings:
InsuranceGroup:
Underwriting............$(33,872)$(21,558)$(33,872)$(21,558)$(18,400)$(11,345)
NetInvestmentIncome...43,81041,62043,81041,62039,11435,270
BerkshireWaumbecTextiles(100)(1,545)(100)(1,545)(63)(862)
AssociatedRetailStores..697914697914355446
NebraskaFurnitureMart(1)3,8123,0491,521
SeesCandies.............27,41123,88424,52614,23512,2126,914
BuffaloEveningNews......19,352(1,215)16,547(724)8,832(226)
BlueChipStamps(2).......(1,422)4,182(1,876)2,492(353)2,472
WescoFinancialParent..7,4936,1564,8442,9373,4482,210
MutualSavingsandLoan...(798)(6)(467)(2)1,9171,524
PrecisionSteel...........3,2411,0352,1024931,136265
InterestonDebt..........(15,104)(14,996)(13,844)(12,977)(7,346)(6,951)
SpecialGEICODistribution21,00021,00019,551
ShareholderDesignated
Contributions..........(3,066)(891)(3,066)(891)(1,656)(481)
AmortizationofGoodwill..(532)151(563)90(563)90
Other.....................10,1213,3719,6232,6588,4902,171

OperatingEarnings..........82,04341,10272,41027,74268,19531,497
Salesofsecuritiesand
unusualsalesofassets..67,26036,65165,08921,87545,29814,877

TotalEarnings..............$149,303$77,753$137,499$49,617$113,493$46,374
================================================
(1)OctoberthroughDecember
(2)1982and1983arenotcomparable;majorassetswere
transferredinthemerger.
ForadiscussionofthebusinessesownedbyWesco,please
readCharlieMungersreportonpages4651.Charliereplaced
LouieVincentiasChairmanofWescolatein1983whenhealth
forcedLouiesretirementatage77.Insomeinstances,health
isaeuphemism,butinLouiescasenothingbuthealthwould
causeustoconsiderhisretirement.Louieisamarvelousman
andhasbeenamarvelousmanager.
ThespecialGEICOdistributionreportedinthetablearose
whenthatcompanymadeatenderofferforaportionofitsstock,
buyingbothfromusandothershareholders.AtGEICOsrequest,
wetenderedaquantityofsharesthatkeptourownership
percentagethesameafterthetransactionasbefore.The
proportionalnatureofoursalepermittedustotreatthe
proceedsasadividend.Unlikeindividuals,corporationsnet
considerablymorewhenearningsarederivedfromdividendsrather
thanfromcapitalgains,sincetheeffectiveFederalincometax
rateondividendsis6.9%versus28%oncapitalgains.
Evenwiththisspecialitemaddedin,ourtotaldividends
fromGEICOin1983wereconsiderablylessthanourshareof
GEICOsearnings.Thusitisperfectlyappropriate,frombothan
accountingandeconomicstandpoint,toincludetheredemption
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proceedsinourreportedearnings.Itisbecausetheitemis
largeandunusualthatwecallyourattentiontoit.
Thetableshowingyouoursourcesofearningsincludes
dividendsfromthosenoncontrolledcompanieswhosemarketable
equitysecuritiesweown.Butthetabledoesnotinclude
earningsthosecompanieshaveretainedthatareapplicabletoour
ownership.Inaggregateandovertimeweexpectthose
undistributedearningstobereflectedinmarketpricesandto
increaseourintrinsicbusinessvalueonadollarfordollar
basis,justasifthoseearningshadbeenunderourcontroland
reportedaspartofourprofits.Thatdoesnotmeanweexpect
allofourholdingstobehaveuniformly;somewilldisappointus,
otherswilldeliverpleasantsurprises.Todateourexperience
hasbeenbetterthanweoriginallyanticipated,Inaggregate,we
havereceivedfarmorethanadollarofmarketvaluegainfor
everydollarofearningsretained.
Thefollowingtableshowsour1983yearendnetholdingsin
marketableequities.Allnumbersrepresent100%ofBerkshires
holdings,and80%ofWescosholdings.Theportionattributable
tominorityshareholdersofWescohasbeenexcluded.
No.ofSharesCostMarket

(000somitted)
690,975AffiliatedPublications,Inc.....$3,516$26,603
4,451,544GeneralFoodsCorporation(a).....163,786228,698
6,850,000GEICOCorporation................47,138398,156
2,379,200Handy&Harman...................27,31842,231
636,310InterpublicGroupofCompanies,Inc.4,05633,088
197,200MediaGeneral....................3,19111,191
250,400Ogilvy&MatherInternational....2,58012,833
5,618,661R.J.ReynoldsIndustries,Inc.(a)268,918341,334
901,788Time,Inc........................27,73256,860
1,868,600TheWashingtonPostCompany......10,628136,875

$558,863$1,287,869
AllOtherCommonStockholdings...7,48518,044

TotalCommonStocks..............$566,348$1,305,913
====================
(a)WESCOownssharesinthesecompanies.
Baseduponpresentholdingsandpresentdividendrates
excludinganyspecialitemssuchastheGEICOproportional
redemptionlastyearwewouldexpectreporteddividendsfrom
thisgrouptobeapproximately$39millionin1984.Wecanalso
makeaveryroughguessabouttheearningsthisgroupwillretain
thatwillbeattributabletoourownership:thesemaytotalabout
$65millionfortheyear.Theseretainedearningscouldwell
havenoimmediateeffectonmarketpricesofthesecurities.
Overtime,however,wefeeltheywillhaverealmeaning.
Inadditiontothefiguresalreadysupplied,information
regardingthebusinesseswecontrolappearsinManagements
Discussiononpages4044.Themostsignificantoftheseare
BuffaloEveningNews,Sees,andtheInsuranceGroup,towhichwe
willgivesomespecialattentionhere.
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BuffaloEveningNews
First,aclarification:ourcorporatenameisBuffalo
EveningNews,Inc.butthenameofthenewspaper,sincewebegan
amorningeditionalittleoverayearago,isBuffaloNews.
In1983theNewssomewhatexceededitstargetedprofit
marginof10%aftertax.Twofactorswereresponsible:(1)a
stateincometaxcostthatwassubnormalbecauseofalargeloss
carryforward,nowfullyutilized,and(2)alargedropinthe
pertoncostofnewsprint(anunanticipatedflukethatwillbe
reversedin1984).
Althoughourprofitmarginsin1983wereaboutaveragefor
newspaperssuchastheNews,thepapersperformance,
nevertheless,wasasignificantachievementconsideringthe
economicandretailingenvironmentinBuffalo.
Buffalohasaconcentrationofheavyindustry,asegmentof
theeconomythatwashitparticularlyhardbytherecent
recessionandthathaslaggedtherecovery.AsBuffaloconsumers
havesuffered,soalsohavethepapersretailingcustomers.
Theirnumbershaveshrunkoverthepastfewyearsandmanyof
thosesurvivinghavecuttheirlinage.
WithinthisenvironmenttheNewshasoneexceptional
strength:itsacceptancebythepublic,amattermeasuredbythe
paperspenetrationratiothepercentageofhouseholdswithin
thecommunitypurchasingthepapereachday.Ourratiois
superb:forthesixmonthsendedSeptember30,1983theNews
stoodnumberoneinweekdaypenetrationamongthe100largest
papersintheUnitedStates(therankingisbasedoncityzone
numberscompiledbytheAuditBureauofCirculations).
Ininterpretingthestandings,itisimportanttonotethat
manylargecitieshavetwopapers,andthatinsuchcasesthe
penetrationofeitherpaperisnecessarilylowerthanifthere
wereasinglepaper,asinBuffalo.Nevertheless,thelistof
the100largestpapersincludesmanythathaveacityto
themselves.Amongthese,theNewsisatthetopnationally,far
aheadofmanyofthecountrysbestknowndailies.
AmongSundayeditionsofthesesamelargedailies,theNews
ranksnumberthreeinpenetrationtentotwentypercentage
pointsaheadofmanywellknownpapers.Itwasnotalwaysthis
wayinBuffalo.BelowweshowSundaycirculationinBuffaloin
theyearspriorto1977comparedwiththepresentperiod.In
thatearlierperiodtheSundaypaperwastheCourierExpress(the
NewswasnotthenpublishingaSundaypaper).Now,ofcourse,it
istheNews.
AverageSundayCirculation

YearCirculation

1970314,000
1971306,000
1972302,000
1973290,000
1974278,000
1975269,000
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1976270,000
1984(Current)376,000
Webelieveapaperspenetrationratiotobethebest
measureofthestrengthofitsfranchise.Paperswithunusually
highpenetrationinthegeographicalareathatisofprime
interesttomajorlocalretailers,andwithrelativelylittle
circulationelsewhere,areexceptionallyefficientbuysforthose
retailers.Lowpenetrationpapershaveafarlesscompelling
messagetopresenttoadvertisers.
Inouropinion,threefactorslargelyaccountforthe
unusualacceptanceoftheNewsinthecommunity.Amongthese,
points2and3alsomayexplainthepopularityoftheSundayNews
comparedtothatoftheSundayCourierExpresswhenitwasthe
soleSundaypaper:
(1)Thefirstpointhasnothingtodowithmeritsofthe
News.Bothemigrationandimmigrationarerelatively
lowinBuffalo.Astablepopulationismoreinterested
andinvolvedintheactivitiesofitscommunitythanis
ashiftingpopulationand,asaresult,ismore
interestedinthecontentofthelocaldailypaper.
Increasethemovementinandoutofacityand
penetrationratioswillfall.
(2)TheNewshasareputationforeditorialqualityand
integritythatwashonedbyourlongtimeeditor,the
legendaryAlfredKirchhofer,andthathasbeenpreserved
andextendedbyMurrayLight.Thisreputationwas
enormouslyimportanttooursuccessinestablishinga
Sundaypaperagainstentrenchedcompetition.Andwithout
aSundayedition,theNewswouldnothavesurvivedinthe
longrun.
(3)TheNewslivesuptoitsnameitdeliversavery
unusualamountofnews.During1983,ournewshole
(editorialmaterialnotads)amountedto50%ofthe
newspaperscontent(excludingpreprintedinserts).
Amongpapersthatdominatetheirmarketsandthatareof
comparableorlargersize,weknowofonlyonewhosenews
holepercentageexceedsthatoftheNews.Comprehensive
figuresarenotavailable,butasamplingindicatesan
averagepercentageinthehigh30s.Inotherwords,page
forpage,ourmixgivesreadersover25%morenewsthan
thetypicalpaper.Thisnewsrichmixtureisbyintent.
Somepublishers,pushingforhigherprofitmargins,have
cuttheirnewsholesduringthepastdecade.Wehave
maintainedoursandwillcontinuetodoso.Properly
writtenandedited,afullservingofnewsmakesour
papermorevaluabletothereaderandcontributestoour
unusualpenetrationratio.
DespitethestrengthoftheNewsfranchise,gainsinROP
linage(advertisingprintedwithinthenewspaperpagesas
contrastedtopreprintedinserts)aregoingtobeverydifficult
toachieve.Wehadanenormousgaininpreprintsduring1983:
linesrosefrom9.3millionto16.4million,revenuesfrom$3.6
millionto$8.1million.Thesegainsareconsistentwith
nationaltrends,butexaggeratedinourcasebybusinesswe
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pickedupwhentheCourierExpressclosed.
Onbalance,theshiftfromROPtopreprintshasnegative
economicimplicationsforus.Profitabilityonpreprintsisless
andthebusinessismoresubjecttocompetitionfromalternative
meansofdelivery.Furthermore,areductioninROPlinagemeans
lessabsolutespacedevotedtonews(sincethenewshole
percentageremainsconstant),therebyreducingtheutilityofthe
papertothereader.
StanLipseybecamePublisheroftheBuffaloNewsatmidyear
upontheretirementofHenryUrban.Henryneverflinchedduring
thedarkdaysoflitigationandlossesfollowingourintroduction
oftheSundaypaperanintroductionwhosewisdomwasquestioned
bymanyinthenewspaperbusiness,includingsomewithinourown
building.HenryisadmiredbytheBuffalobusinesscommunity,
hesadmiredbyallwhoworkedforhim,andheisadmiredby
Charlieandme.StanworkedwithHenryforseveralyears,and
hasworkedforBerkshireHathawaysince1969.Hehasbeen
personallyinvolvedinallnutsandboltsaspectsofthe
newspaperbusinessfromeditorialtocirculation.Wecouldntdo
better.
SeesCandyShops
ThefinancialresultsatSeescontinuetobeexceptional.
Thebusinesspossessesavaluableandsolidconsumerfranchise
andamanagerequallyvaluableandsolid.
InrecentyearsSeeshasencounteredtwoimportant
problems,atleastoneofwhichiswellonitswaytoward
solution.Thatproblemconcernscosts,exceptthoseforraw
materials.Wehaveenjoyedabreakonrawmaterialcostsin
recentyearsthoughso,ofcourse,haveourcompetitors.Oneof
thesedayswewillgetanastysurpriseintheopposite
direction.Ineffect,rawmaterialcostsarelargelybeyondour
controlsincewewill,asamatterofcourse,buythefinest
ingredientsthatwecan,regardlessofchangesintheirprice
levels.Weregardproductqualityassacred.
Butotherkindsofcostsaremorecontrollable,anditisin
thisareathatwehavehadproblems.Onaperpoundbasis,our
costs(notincludingthoseforrawmaterials)haveincreasedin
thelastfewyearsataratesignificantlygreaterthanthe
increaseinthegeneralpricelevel.Itisvitaltoour
competitivepositionandprofitpotentialthatwereversethis
trend.
Inrecentmonthsmuchbettercontrolovercostshasbeen
attainedandwefeelcertainthatourrateofgrowthinthese
costsin1984willbebelowtherateofinflation.This
confidencearisesoutofourlongexperiencewiththemanagerial
talentsofChuckHuggins.WeputChuckinchargethedaywetook
over,andhisrecordhasbeensimplyextraordinary,asshownby
thefollowingtable:
5253WeekYearOperatingNumberofNumberof
EndedAboutSalesProfitsPoundsofStoresOpen
December31RevenuesAfterTaxesCandySoldatYearEnd

1983(53weeks)...$133,531,000$13,699,00024,651,000207
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1982..............123,662,00011,875,00024,216,000202
1981..............112,578,00010,779,00024,052,000199
1980..............97,715,0007,547,00024,065,000191
1979..............87,314,0006,330,00023,985,000188
1978..............73,653,0006,178,00022,407,000182
1977..............62,886,0006,154,00020,921,000179
1976(53weeks)...56,333,0005,569,00020,553,000173
1975..............50,492,0005,132,00019,134,000172
1974..............41,248,0003,021,00017,883,000170
1973..............35,050,0001,940,00017,813,000169
1972..............31,337,0002,083,00016,954,000167
Theotherproblemweface,asthetablesuggests,isour
recentinabilitytoachievemeaningfulgainsinpoundssold.The
industryhasthesameproblem.Butformanyyearswe
outperformedtheindustryinthisrespectandnowwearenot.
Thepoundagevolumeinourretailstoreshasbeenvirtually
unchangedeachyearforthepastfour,despitesmallincreases
everyyearinthenumberofshops(andindistributionexpenseas
well).Ofcourse,dollarvolumehasincreasedbecausewehave
raisedpricessignificantly.Butweregardthemostimportant
measureofretailtrendstobeunitssoldperstoreratherthan
dollarvolume.Onasamestorebasis(countingonlyshopsopen
throughoutbothyears)withallfiguresadjustedtoa52week
year,poundagewasdown.8of1%during1983.Thissmalldecline
wasourbestsamestoreperformancesince1979;thecumulative
declinesincethenhasbeenabout8%.Quantityordervolume,
about25%ofourtotal,hasplateauedinrecentyearsfollowing
verylargepoundagegainsthroughoutthe1970s.
Wearenotsuretowhatextentthisflatvolumebothin
theretailshopareaandthequantityorderareaisduetoour
pricingpoliciesandtowhatextentitisduetostaticindustry
volume,therecession,andtheextraordinaryshareofmarketwe
alreadyenjoyinourprimarymarketingarea.Ourpriceincrease
for1984ismuchmoremodestthanhasbeenthecaseinthepast
fewyears,andwehopethatnextyearwecanreportbettervolume
figurestoyou.Butwehavenobasistoforecastthese.
Despitethevolumeproblem,Seesstrengthsaremanyand
important.Inourprimarymarketingarea,theWest,ourcandyis
preferredbyanenormousmargintothatofanycompetitor.In
fact,webelievemostloversofchocolatepreferittocandy
costingtwoorthreetimesasmuch.(Incandy,asinstocks,
priceandvaluecandiffer;priceiswhatyougive,valueiswhat
youget.)Thequalityofcustomerserviceinourshopsoperated
throughoutthecountrybyusandnotbyfranchiseesiseverybit
asgoodastheproduct.Cheerful,helpfulpersonnelareasmuch
atrademarkofSeesasisthelogoonthebox.Thatsnosmall
achievementinabusinessthatrequiresustohireabout2000
seasonalworkers.Weknowofnocomparablysizedorganization
thatbettersthequalityofcustomerservicedeliveredbyChuck
Hugginsandhisassociates.
Becausewehaveraisedpricessomodestlyin1984,weexpect
Seesprofitsthisyeartobeaboutthesameasin1983.
InsuranceControlledOperations
Webothoperateinsurancecompaniesandhavealarge
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economicinterestinaninsurancebusinesswedontoperate,
GEICO.Theresultsforallcanbesummedupeasily:in
aggregate,thecompaniesweoperateandwhoseunderwriting
resultsreflecttheconsequencesofdecisionsthatweremy
responsibilityafewyearsago,hadabsolutelyterribleresults.
Fortunately,GEICO,whosepoliciesIdonotinfluence,simply
shotthelightsout.Theinferenceyoudrawfromthissummaryis
thecorrectone.Imadesomeseriousmistakesafewyearsago
thatcamehometoroost.
Theindustryhaditsworstunderwritingyearinalongtime,
asindicatedbythetablebelow:
YearlyChangeCombinedRatio
inPremiumsafterPolicy
Written(%)holderDividends

1972....................10.296.2
1973....................8.099.2
1974....................6.2105.4
1975....................11.0107.9
1976....................21.9102.4
1977....................19.897.2
1978....................12.897.5
1979....................10.3100.6
1980....................6.0103.1
1981....................3.9106.0
1982(Revised)..........4.4109.7
1983(Estimated)........4.6111.0
Source:BestsAggregatesandAverages.
Bestsdatareflecttheexperienceofpracticallytheentire
industry,includingstock,mutual,andreciprocalcompanies.The
combinedratiorepresentstotalinsurancecosts(lossesincurred
plusexpenses)comparedtorevenuefrompremiums;aratiobelow
100indicatesanunderwritingprofitandoneabove100indicates
aloss.
Forthereasonsoutlinedinlastyearsreport,weexpect
thepoorindustryexperienceof1983tobemoreorlesstypical
foragoodmanyyearstocome.(AsYogiBerraputit:Itwillbe
dejavualloveragain.)Thatdoesntmeanwethinkthefigures
wontbouncearoundabit;theyarecertainto.Butwebelieve
ithighlyunlikelythatthecombinedratioduringthebalanceof
thedecadewillaveragesignificantlybelowthe19811983level.
Basedonourexpectationsregardinginflationandweareas
pessimisticaseveronthatfrontindustrypremiumvolumemust
growabout10%annuallymerelytostabilizelossratiosat
presentlevels.
Ourowncombinedratioin1983was121.SinceMikeGoldberg
recentlytookovermostoftheresponsibilityfortheinsurance
operation,itwouldbeniceformeifourshortcomingscouldbe
placedathisdoorstepratherthanmine.Butunfortunately,as
wehaveoftenpointedout,theinsurancebusinesshasalong
leadtime.Thoughbusinesspoliciesmaybechangedandpersonnel
improved,asignificantperiodmustpassbeforetheeffectsare
seen.(Thischaracteristicofthebusinessenabledustomakea
greatdealofmoneyinGEICO;wecouldpicturewhatwaslikelyto
happenwellbeforeitactuallyoccurred.)Sotherootsofthe
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1983resultsareoperatingandpersonneldecisionsmadetwoor
moreyearsbackwhenIhaddirectmanagerialresponsibilityfor
theinsurancegroup.
Despiteourpoorresultsoverall,severalofourmanagers
didtrulyoutstandingjobs.RolandMillerguidedtheautoand
generalliabilitybusinessofNationalIndemnityCompanyand
NationalFireandMarineInsuranceCompanytoimprovedresults,
whilethoseofcompetitorsdeteriorated.Inaddition,TomRowley
atContinentalDivideInsuranceourfledglingColorado
homestatecompanyseemscertaintobeawinner.Mikefoundhim
alittleoverayearago,andhewasanimportantacquisition.
Wehavebecomeactiverecentlyandhopetobecomemuch
moreactiveinreinsurancetransactionswherethebuyers
overridingconcernshouldbethesellerslongterm
creditworthiness.Insuchtransactionsourpremierfinancial
strengthshouldmakeusthenumberonechoiceofbothclaimants
andinsurerswhomustrelyonthereinsurerspromisesfora
greatmanyyearstocome.
Amajorsourceofsuchbusinessisstructuredsettlements
aprocedureforsettlinglossesunderwhichclaimantsreceive
periodicpayments(almostalwaysmonthly,forlife)ratherthana
singlelumpsumsettlement.Thisformofsettlementhas
importanttaxadvantagesfortheclaimantandalsopreventshis
squanderingalargelumpsumpayment.Frequently,someinflation
protectionisbuiltintothesettlement.Usuallytheclaimant
hasbeenseriouslyinjured,andthustheperiodicpaymentsmust
beunquestionablysecurefordecadestocome.Webelievewe
offerunparalleledsecurity.Nootherinsurerweknowofeven
thosewithmuchlargergrossassetshasourfinancialstrength.
Wealsothinkourfinancialstrengthshouldrecommendusto
companieswishingtotransferlossreserves.Insuch
transactions,otherinsurancecompaniespayuslumpsumsto
assumeall(oraspecifiedportionof)futurelosspayments
applicabletolargeblocksofexpiredbusiness.Herealso,the
companytransferringsuchclaimsneedstobecertainofthe
transfereesfinancialstrengthformanyyearstocome.Again,
mostofourcompetitorssolicitingsuchbusinessappeartousto
haveafinancialconditionthatismateriallyinferiortoours.
Potentially,structuredsettlementsandtheassumptionof
lossreservescouldbecomeverysignificanttous.Becauseof
theirpotentialsizeandbecausetheseoperationsgeneratelarge
amountsofinvestmentincomecomparedtopremiumvolume,wewill
showunderwritingresultsfromthosebusinessesonaseparate
lineinourinsurancesegmentdata.Wealsowillexcludetheir
effectinreportingourcombinedratiotoyou.Wefrontendno
profitonstructuredsettlementorlossreservetransactions,and
allattributableoverheadisexpensedcurrently.Bothbusinesses
arerunbyDonWursteratNationalIndemnityCompany.
InsuranceGEICO
Geicosperformanceduring1983wasasgoodasourown
insuranceperformancewaspoor.Comparedtotheindustrys
combinedratioof111,GEICOwroteat96afteralargevoluntary
accrualforpolicyholderdividends.AfewyearsagoIwouldnot
havethoughtGEICOcouldsogreatlyoutperformtheindustry.Its
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superiorityreflectsthecombinationofatrulyexceptional
businessideaandanexceptionalmanagement.
JackByrneandBillSnyderhavemaintainedextraordinary
disciplineintheunderwritingarea(including,crucially,
provisionforfullandproperlossreserves),andtheirefforts
arenowbeingfurtherrewardedbysignificantgainsinnew
business.Equallyimportant,LouSimpsonistheclassofthe
fieldamonginsuranceinvestmentmanagers.Thethreeofthemare
someteam.
WehaveapproximatelyaonethirdinterestinGEICO.That
givesusa$270millionshareinthecompanyspremiumvolume,an
amountsome80%largerthanourownvolume.Thus,themajor
portionofourtotalinsurancebusinesscomesfromthebest
insurancebookinthecountry.Thisfactdoesnotmoderatebyan
iotatheneedforustoimproveourownoperation.
StockSplitsandStockActivity
WeoftenareaskedwhyBerkshiredoesnotsplititsstock.
Theassumptionbehindthisquestionusuallyappearstobethata
splitwouldbeaproshareholderaction.Wedisagree.Letme
tellyouwhy.
OneofourgoalsistohaveBerkshireHathawaystocksellat
apricerationallyrelatedtoitsintrinsicbusinessvalue.(But
noterationallyrelated,notidentical:ifwellregarded
companiesaregenerallysellinginthemarketatlargediscounts
fromvalue,Berkshiremightwellbepricedsimilarly.)Thekeyto
arationalstockpriceisrationalshareholders,bothcurrentand
prospective.
Iftheholdersofacompanysstockand/ortheprospective
buyersattractedtoitarepronetomakeirrationaloremotion
baseddecisions,someprettysillystockpricesaregoingto
appearperiodically.Manicdepressivepersonalitiesproduce
manicdepressivevaluations.Suchaberrationsmayhelpusin
buyingandsellingthestocksofothercompanies.Butwethink
itisinbothyourinterestandourstominimizetheiroccurrence
inthemarketforBerkshire.
Toobtainonlyhighqualityshareholdersisnocinch.Mrs.
Astorcouldselecther400,butanyonecanbuyanystock.
Enteringmembersofashareholderclubcannotbescreenedfor
intellectualcapacity,emotionalstability,moralsensitivityor
acceptabledress.Shareholdereugenics,therefore,mightappear
tobeahopelessundertaking.
Inlargepart,however,wefeelthathighqualityownership
canbeattractedandmaintainedifweconsistentlycommunicate
ourbusinessandownershipphilosophyalongwithnoother
conflictingmessagesandthenletselfselectionfollowits
course.Forexample,selfselectionwilldrawafardifferent
crowdtoamusicaleventadvertisedasanoperathanone
advertisedasarockconcerteventhoughanyonecanbuyaticket
toeither.
Throughourpoliciesandcommunicationsour
advertisementswetrytoattractinvestorswhowill
understandouroperations,attitudesandexpectations.(And,
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fullyasimportant,wetrytodissuadethosewhowont.)Wewant
thosewhothinkofthemselvesasbusinessownersandinvestin
companieswiththeintentionofstayingalongtime.And,we
wantthosewhokeeptheireyesfocusedonbusinessresults,not
marketprices.
Investorspossessingthosecharacteristicsareinasmall
minority,butwehaveanexceptionalcollectionofthem.I
believewellover90%probablyover95%ofoursharesare
heldbythosewhowereshareholdersofBerkshireorBlueChip
fiveyearsago.AndIwouldguessthatover95%ofourshares
areheldbyinvestorsforwhomtheholdingisatleastdoublethe
sizeoftheirnextlargest.Amongcompanieswithatleast
severalthousandpublicshareholdersandmorethan$1billionof
marketvalue,wearealmostcertainlytheleaderinthedegreeto
whichourshareholdersthinkandactlikeowners.Upgradinga
shareholdergroupthatpossessesthesecharacteristicsisnot
easy.
Werewetosplitthestockortakeotheractionsfocusingon
stockpriceratherthanbusinessvalue,wewouldattractan
enteringclassofbuyersinferiortotheexitingclassof
sellers.At$1300,thereareveryfewinvestorswhocantafford
aBerkshireshare.Wouldapotentialonesharepurchaserbe
betteroffifwesplit100for1sohecouldbuy100shares?
Thosewhothinksoandwhowouldbuythestockbecauseofthe
splitorinanticipationofonewoulddefinitelydowngradethe
qualityofourpresentshareholdergroup.(Couldwereally
improveourshareholdergroupbytradingsomeofourpresent
clearthinkingmembersforimpressionablenewoneswho,
preferringpapertovalue,feelwealthierwithnine$10bills
thanwithone$100bill?)Peoplewhobuyfornonvaluereasons
arelikelytosellfornonvaluereasons.Theirpresenceinthe
picturewillaccentuateerraticpriceswingsunrelatedto
underlyingbusinessdevelopments.
Wewilltrytoavoidpoliciesthatattractbuyerswitha
shorttermfocusonourstockpriceandtrytofollowpolicies
thatattractinformedlongterminvestorsfocusingonbusiness
values.justasyoupurchasedyourBerkshiresharesinamarket
populatedbyrationalinformedinvestors,youdeserveachanceto
sellshouldyoueverwanttointhesamekindofmarket.We
willworktokeepitinexistence.
Oneoftheironiesofthestockmarketistheemphasison
activity.Brokers,usingtermssuchasmarketabilityand
liquidity,singthepraisesofcompanieswithhighshare
turnover(thosewhocannotfillyourpocketwillconfidentlyfill
yourear).Butinvestorsshouldunderstandthatwhatisgoodfor
thecroupierisnotgoodforthecustomer.Ahyperactivestock
marketisthepickpocketofenterprise.
Forexample,consideratypicalcompanyearning,say,12%on
equity.Assumeaveryhighturnoverrateinitssharesof100%
peryear.Ifapurchaseandsaleofthestockeachextract
commissionsof1%(theratemaybemuchhigheronlowpriced
stocks)andifthestocktradesatbookvalue,theownersofour
hypotheticalcompanywillpay,inaggregate,2%ofthecompanys
networthannuallyfortheprivilegeoftransferringownership.
Thisactivitydoesnothingfortheearningsofthebusiness,and
meansthat1/6ofthemarelosttotheownersthroughthe
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frictionalcostoftransfer.(Andthiscalculationdoesnot
countoptiontrading,whichwouldincreasefrictionalcostsstill
further.)
Allthatmakesforaratherexpensivegameofmusical
chairs.Canyouimaginetheagonizedcrythatwouldariseifa
governmentalunitweretoimposeanew162/3%taxonearningsof
corporationsorinvestors?Bymarketactivity,investorscan
imposeuponthemselvestheequivalentofsuchatax.
Dayswhenthemarkettrades100millionshares(andthat
kindofvolume,whenoverthecountertradingisincluded,is
todayabnormallylow)areacurseforowners,notablessing
fortheymeanthatownersarepayingtwiceasmuchtochange
chairsastheyareona50millionshareday.If100million
sharedayspersistforayearandtheaveragecostoneach
purchaseandsaleis15centsashare,thechairchangingtaxfor
investorsinaggregatewouldtotalabout$7.5billionanamount
roughlyequaltothecombined1982profitsofExxon,General
Motors,MobilandTexaco,thefourlargestcompaniesinthe
Fortune500.
Thesecompanieshadacombinednetworthof$75billionat
yearend1982andaccountedforover12%ofbothnetworthandnet
incomeoftheentireFortune500list.Underourassumption
investors,inaggregate,everyyearforfeitallearningsfrom
thisstaggeringsumofcapitalmerelytosatisfytheirpenchant
forfinancialflipflopping.Inaddition,investment
managementfeesofover$2billionannuallysumspaidfor
chairchangingadvicerequiretheforfeiturebyinvestorsof
allearningsofthefivelargestbankingorganizations(Citicorp,
BankAmerica,ChaseManhattan,ManufacturersHanoverandJ.P.
Morgan).Theseexpensiveactivitiesmaydecidewhoeatsthepie,
buttheydontenlargeit.
(Weareawareofthepieexpandingargumentthatsaysthat
suchactivitiesimprovetherationalityofthecapitalallocation
process.Wethinkthatthisargumentisspeciousandthat,on
balance,hyperactiveequitymarketssubvertrationalcapital
allocationandactaspieshrinkers.AdamSmithfeltthatall
noncollusiveactsinafreemarketwereguidedbyaninvisible
handthatledaneconomytomaximumprogress;ourviewisthat
casinotypemarketsandhairtriggerinvestmentmanagementactas
aninvisiblefootthattripsupandslowsdownaforwardmoving
economy.)
ContrastthehyperactivestockwithBerkshire.Thebidand
askspreadinourstockcurrentlyisabout30points,oralittle
over2%.Dependingonthesizeofthetransaction,the
differencebetweenproceedsreceivedbythesellerofBerkshire
andcosttothebuyermayrangedownwardfrom4%(intrading
involvingonlyafewshares)toperhaps11/2%(inlargetrades
wherenegotiationcanreduceboththemarketmakersspreadand
thebrokerscommission).BecausemostBerkshiresharesare
tradedinfairlylargetransactions,thespreadonalltrading
probablydoesnotaveragemorethan2%.
Meanwhile,trueturnoverinBerkshirestock(excluding
interdealertransactions,giftsandbequests)probablyruns3%
peryear.Thusourowners,inaggregate,arepayingperhaps
6/100of1%ofBerkshiresmarketvalueannuallyfortransfer
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privileges.Bythisveryroughestimate,thats$900,000nota
smallcost,butfarlessthanaverage.Splittingthestockwould
increasethatcost,downgradethequalityofourshareholder
population,andencourageamarketpricelessconsistently
relatedtointrinsicbusinessvalue.Weseenooffsetting
advantages.
Miscellaneous
LastyearinthissectionIranasmalladtoencourage
acquisitioncandidates.Inourcommunicationsbusinesseswetell
ouradvertisersthatrepetitionisakeytoresults(whichit
is),sowewillagainrepeatouracquisitioncriteria.
Weprefer:
(1)largepurchases(atleast$5millionofaftertax
earnings),
(2)demonstratedconsistentearningpower(future
projectionsareoflittleinteresttous,norare
turnaroundsituations),
(3)businessesearninggoodreturnsonequitywhile
employinglittleornodebt,
(4)managementinplace(wecantsupplyit),
(5)simplebusinesses(ifthereslotsoftechnology,we
wontunderstandit),
(6)anofferingprice(wedontwanttowasteourtimeor
thatofthesellerbytalking,evenpreliminarily,
aboutatransactionwhenpriceisunknown).
Wewillnotengageinunfriendlytakeovers.Wecanpromise
completeconfidentialityandaveryfastanswercustomarily
withinfiveminutesastowhetherwereinterested.Weprefer
tobuyforcash,butwillconsiderissuanceofstockwhenwe
receiveasmuchinintrinsicbusinessvalueaswegive.We
invitepotentialsellerstocheckusoutbycontactingpeople
withwhomwehavedonebusinessinthepast.Fortheright
businessandtherightpeoplewecanprovideagoodhome.
*****
About96.4%ofalleligiblesharesparticipatedinour1983
shareholderdesignatedcontributionsprogram.Thetotal
contributionsmadepursuanttothisprogramdisbursedinthe
earlydaysof1984butfullyexpensedin1983were$3,066,501,
and1353charitieswererecipients.Althoughtheresponse
measuredbythepercentageofsharesparticipatingwas
extraordinarilygood,theresponsemeasuredbythepercentageof
holdersparticipatingwasnotasgood.Thereasonmaywellbe
thelargenumberofnewshareholdersacquiredthroughthemerger
andtheirlackoffamiliaritywiththeprogram.Weurgenew
shareholderstoreadthedescriptionoftheprogramonpages52
53.
Ifyouwishtoparticipateinfutureprograms,westrongly
urgethatyouimmediatelymakesurethatyoursharesare
registeredintheactualownersname,notinstreetornominee
name.SharesnotsoregisteredonSeptember28,1984willnotbe
eligibleforany1984program.
*****
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TheBlueChip/Berkshiremergerwentoffwithoutahitch.
Lessthanonetenthof1%ofthesharesofeachcompanyvoted
againstthemerger,andnorequestsforappraisalweremade.In
1983,wegainedsometaxefficiencyfromthemergerandweexpect
togainmoreinthefuture.
Oneinterestingsidelighttothemerger:Berkshirenowhas
1,146,909sharesoutstandingcomparedto1,137,778sharesatthe
beginningoffiscal1965,theyearpresentmanagementassumed
responsibility.Forevery1%ofthecompanyyouownedatthat
time,younowwouldown.99%.Thus,alloftodaysassetsthe
News,Sees,NebraskaFurnitureMart,theInsuranceGroup,$1.3
billioninmarketablestocks,etc.havebeenaddedtothe
originaltextileassetswithvirtuallynonetdilutiontothe
originalowners.
WearedelightedtohavetheformerBlueChipshareholders
joinus.ToaidinyourunderstandingofBerkshireHathaway,we
willbegladtosendyoutheCompendiumofLettersfromthe
AnnualReportsof19771981,and/orthe1982Annualreport.
DirectyourrequesttotheCompanyat1440KiewitPlaza,Omaha,
Nebraska68131.
WarrenE.Buffett
March14,1984ChairmanoftheBoard

Appendix
BERKSHIREHATHAWAYINC.

GoodwillanditsAmortization:TheRulesandTheRealities
ThisappendixdealsonlywitheconomicandaccountingGoodwillnotthegoodwillofeverydayusage.Forexample,a
business may be well liked, even loved, by most of its customers but possess no economic goodwill. (AT&T, before the
breakup,wasgenerallywellthoughtof,butpossessednotadimeofeconomicGoodwill.)And,regrettably,abusinessmaybe
dislikedbyitscustomersbutpossesssubstantial,andgrowing,economicGoodwill.So,justforthemoment,forgetemotions
andfocusonlyoneconomicsandaccounting.
Whenabusinessispurchased,accountingprinciplesrequirethatthepurchasepricefirstbeassignedtothefairvalueofthe
identifiableassetsthatareacquired.Frequentlythesumofthefairvaluesputontheassets(afterthedeductionofliabilities)
islessthanthetotalpurchasepriceofthebusiness.Inthatcase,thedifferenceisassignedtoanassetaccountentitled"excess
ofcostoverequityinnetassetsacquired".Toavoidconstantrepetitionofthismouthful,wewillsubstitute"Goodwill".
AccountingGoodwillarisingfrombusinessespurchasedbeforeNovember1970hasaspecialstanding.Except under rare
circumstances, it can remain an asset on the balance sheet as long as the business bought is retained. That means no
amortizationchargestograduallyextinguishthatassetneedbemadeagainstearnings.
The case is different, however, with purchases made from November 1970 on. When these create Goodwill, it must be
amortizedovernotmorethan40yearsthroughchargesofequalamountineveryyeartotheearningsaccount.Since40
years is the maximum period allowed, 40 years is what managements (including us) usually elect. This annual charge to
earningsisnotallowedasataxdeductionand,thus,hasaneffectonaftertaxincomethatisroughlydoublethatofmost
otherexpenses.
ThatshowaccountingGoodwillworks.Toseehowitdiffersfromeconomicreality,letslookatanexamplecloseathand.
Well round some figures, and greatly oversimplify, to make the example easier to follow. Well also mention some
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implicationsforinvestorsandmanagers.
BlueChipStampsboughtSeesearlyin1972for$25million,atwhichtimeSeeshadabout$8millionofnettangibleassets.
(Throughout this discussion, accounts receivable will be classified as tangible assets, a definition proper for business
analysis.)Thisleveloftangibleassetswasadequatetoconductthebusinesswithoutuseofdebt,exceptforshortperiods
seasonally.Seeswasearningabout$2millionaftertaxatthetime,andsuchearningsseemedconservativelyrepresentative
offutureearningpowerinconstant1972dollars.
Thusourfirstlesson:businesseslogicallyareworthfarmorethannettangibleassetswhentheycanbeexpectedtoproduce
earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is
economicGoodwill.
In1972(andnow)relativelyfewbusinessescouldbeexpectedtoconsistentlyearnthe25%aftertaxonnettangibleassets
thatwasearnedbySeesdoingit,furthermore,withconservativeaccountingandnofinancialleverage.Itwasnotthefair
market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a
combinationofintangibleassets,particularlyapervasivefavorablereputationwithconsumersbaseduponcountlesspleasant
experiencestheyhavehadwithbothproductandpersonnel.
Suchareputationcreatesaconsumerfranchisethatallowsthevalueoftheproducttothepurchaser,ratherthanitsproduction
cost, to be the major determinant of selling price. Consumer franchises are a prime source of economic Goodwill. Other
sourcesincludegovernmentalfranchisesnotsubjecttoprofitregulation,suchastelevisionstations,andanenduringposition
asthelowcostproducerinanindustry.
LetsreturntotheaccountingintheSeesexample.BlueChipspurchaseofSeesat$17millionovernettangibleassets
required that a Goodwill account of this amount be established as an asset on Blue Chips books and that $425,000 be
chargedtoincomeannuallyfor40yearstoamortizethatasset.By1983,after11yearsofsuchcharges,the$17millionhad
beenreducedtoabout$12.5million.Berkshire,meanwhile,owned60%ofBlueChipand,therefore,also60%ofSees.This
ownershipmeantthatBerkshiresbalancesheetreflected60%ofSeesGoodwill,orabout$7.5million.
In1983BerkshireacquiredtherestofBlueChipinamergerthatrequiredpurchaseaccountingascontrastedtothe"pooling"
treatmentallowedforsomemergers.Underpurchaseaccounting,the"fairvalue"oftheshareswegaveto(or"paid")Blue
ChipholdershadtobespreadoverthenetassetsacquiredfromBlueChip.This"fairvalue"wasmeasured,asitalmostalways
iswhenpubliccompaniesusetheirsharestomakeacquisitions,bythemarketvalueofthesharesgivenup.
Theassets"purchased"consistedof40%ofeverythingownedbyBlueChip(asnoted,Berkshirealreadyownedtheother
60%).WhatBerkshire"paid"wasmorethanthenetidentifiableassetswereceivedby$51.7million,andwasassignedtotwo
piecesofGoodwill:$28.4milliontoSeesand$23.3milliontoBuffaloEveningNews.
After the merger, therefore, Berkshire was left with a Goodwill asset for Sees that had two components: the $7.5 million
remaining from the 1971 purchase, and $28.4 million newly created by the 40% "purchased" in 1983. Our amortization
chargenowwillbeabout$1.0millionforthenext28years,and$.7millionforthefollowing12years,2002through2013.
Inotherwords,differentpurchasedatesandpriceshavegivenusvastlydifferentassetvaluesandamortizationchargesfor
twopiecesofthesameasset.(Werepeatourusualdisclaimer:wehavenobetteraccountingsystemtosuggest.Theproblems
tobedealtwitharemindbogglingandrequirearbitraryrules.)
Butwhataretheeconomicrealities?One reality is that the amortization charges that have been deducted as costs in the
earningsstatementeachyearsinceacquisitionofSeeswerenottrueeconomiccosts.WeknowthatbecauseSeeslastyear
earned $13 million after taxes on about $20 million of net tangible assets a performance indicating the existence of
economic Goodwill far larger than the total original cost of our accounting Goodwill. In other words, while accounting
Goodwillregularlydecreasedfromthemomentofpurchase,economicGoodwillincreasedinirregularbutverysubstantial
fashion.
Another reality is that annual amortization charges in the future will not correspond to economic costs. It is possible, of
course,thatSeeseconomicGoodwillwilldisappear.Butitwontshrinkinevendecrementsoranythingremotelyresembling
them.WhatismorelikelyisthattheGoodwillwillincreaseincurrent,ifnotinconstant,dollarsbecauseofinflation.
That probability exists because true economic Goodwill tends to rise in nominal value proportionally with inflation. To
illustratehowthisworks,letscontrastaSeeskindofbusinesswithamoremundanebusiness.WhenwepurchasedSeesin
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1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our
hypotheticalmundanebusinessthenhad$2millionofearningsalso,butneeded$18millioninnettangibleassetsfornormal
operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic
Goodwill.
Abusinesslikethat,therefore,mightwellhavesoldforthevalueofitsnettangibleassets,orfor$18million.Incontrast,we
paid $25 million for Sees, even though it had no more in earnings and less than half as much in "honesttoGod" assets.
Couldlessreallyhavebeenmore,asourpurchasepriceimplied?Theansweris"yes"evenifbothbusinesseswereexpected
tohaveflatunitvolumeaslongasyouanticipated,aswedidin1972,aworldofcontinuousinflation.
Tounderstandwhy,imaginetheeffectthatadoublingofthepricelevelwouldsubsequentlyhaveonthetwobusinesses.
Bothwouldneedtodoubletheirnominalearningsto$4milliontokeepthemselvesevenwithinflation.Thiswouldseemto
benogreattrick:justsellthesamenumberofunitsatdoubleearlierpricesand,assumingprofitmarginsremainunchanged,
profitsalsomustdouble.
But,crucially,tobringthatabout,bothbusinessesprobablywouldhavetodoubletheirnominalinvestmentinnettangible
assets,sincethatisthekindofeconomicrequirementthatinflationusuallyimposesonbusinesses,bothgoodandbad.A
doublingofdollarsalesmeanscorrespondinglymoredollarsmustbeemployedimmediatelyinreceivablesandinventories.
Dollarsemployedinfixedassetswillrespondmoreslowlytoinflation,butprobablyjustassurely.Andallofthisinflation
requiredinvestmentwillproducenoimprovementinrateofreturn.Themotivationforthisinvestmentisthesurvivalofthe
business,nottheprosperityoftheowner.
Remember,however,thatSeeshadnettangibleassetsofonly$8million.Soitwouldonlyhavehadtocommitanadditional
$8milliontofinancethecapitalneedsimposedbyinflation.Themundanebusiness,meanwhile,hadaburdenovertwiceas
largeaneedfor$18millionofadditionalcapital.
After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its
tangibleassets,or$36million.Thatmeansitsownerswouldhavegainedonlyadollarofnominalvalueforeverynewdollar
invested.(Thisisthesamedollarfordollarresulttheywouldhaveachievediftheyhadaddedmoneytoasavingsaccount.)
Sees,however,alsoearning$4million,mightbeworth$50millionifvalued(asitlogicallywouldbe)onthesamebasisas
itwasatthetimeofourpurchase.Soitwouldhavegained$25millioninnominalvaluewhiletheownerswereputtingup
only$8millioninadditionalcapitalover$3ofnominalvaluegainedforeach$1invested.
Remember,evenso,thattheownersoftheSeeskindofbusinesswereforcedbyinflationtoanteup$8millioninadditional
capitaljusttostayeveninrealprofits.Anyunleveragedbusinessthatrequiressomenettangibleassetstooperate(andalmost
alldo)ishurtbyinflation.Businessesneedinglittleinthewayoftangibleassetssimplyarehurttheleast.
Andthatfact,ofcourse,hasbeenhardformanypeopletograsp.Foryearsthetraditionalwisdomlongontradition,shorton
wisdomheldthatinflationprotectionwasbestprovidedbybusinessesladenwithnaturalresources,plantsandmachinery,
orothertangibleassets("InGoodsWeTrust").Itdoesntworkthatway.Assetheavybusinessesgenerallyearnlowratesof
returnratesthatoftenbarelyprovideenoughcapitaltofundtheinflationaryneedsoftheexistingbusiness,withnothing
leftoverforrealgrowth,fordistributiontoowners,orforacquisitionofnewbusinesses.
In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from
ownershipofoperationsthatcombinedintangiblesoflastingvaluewithrelativelyminorrequirementsfortangibleassets.In
such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the
acquisitionofadditionalbusinesses.Thisphenomenonhasbeenparticularlyevidentinthecommunicationsbusiness.That
businesshasrequiredlittleinthewayoftangibleinvestmentyetitsfranchiseshaveendured.Duringinflation,Goodwillis
thegiftthatkeepsgiving.
Butthatstatementapplies,naturally,onlytotrueeconomicGoodwill.SpuriousaccountingGoodwillandthereisplentyof
itaroundisanothermatter.Whenanoverexcitedmanagementpurchasesabusinessatasillyprice,thesameaccounting
niceties described earlier are observed. Because it cant go anywhere else, the silliness ends up in the Goodwill account.
Consideringthelackofmanagerialdisciplinethatcreatedtheaccount,undersuchcircumstancesitmightbetterbelabeled
"NoWill".Whatevertheterm,the40yearritualtypicallyisobservedandtheadrenalinsocapitalizedremainsonthebooks
asan"asset"justasiftheacquisitionhadbeenasensibleone.
*****
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IfyouclingtoanybeliefthataccountingtreatmentofGoodwillisthebestmeasureofeconomicreality,Isuggestonefinal
itemtoponder.
Assumeacompanywith$20pershareofnetworth,alltangibleassets.Furtherassumethecompanyhasinternallydeveloped
some magnificent consumer franchise, or that it was fortunate enough to obtain some important television stations by
originalFCCgrant.Therefore,itearnsagreatdealontangibleassets,say$5pershare,or25%.
Withsucheconomics,itmightsellfor$100pershareormore,anditmightwellalsobringthatpriceinanegotiatedsaleof
theentirebusiness.
Assumeaninvestorbuysthestockat$100pershare,payingineffect$80pershareforGoodwill(justaswouldacorporate
purchaserbuyingthewholecompany).Shouldtheinvestorimputea$2pershareamortizationchargeannually($80divided
by40years)tocalculate"true"earningspershare?And,ifso,shouldthenew"true"earningsof$3persharecausehimto
rethinkhispurchaseprice?
*****
Webelievemanagersandinvestorsalikeshouldviewintangibleassetsfromtwoperspectives:
1. Inanalysisofoperatingresultsthatis,inevaluatingtheunderlyingeconomicsofabusinessunit
amortizationchargesshouldbeignored.Whatabusinesscanbeexpectedtoearnonunleveragednettangible
assets,excludinganychargesagainstearningsforamortizationofGoodwill,isthebestguidetotheeconomic
attractivenessoftheoperation.Itisalsothebestguidetothecurrentvalueoftheoperationseconomic
Goodwill.
1. Inevaluatingthewisdomofbusinessacquisitions,amortizationchargesshouldbeignoredalso.Theyshould
bedeductedneitherfromearningsnorfromthecostofthebusiness.Thismeansforeverviewingpurchased
Goodwillatitsfullcost,beforeanyamortization.Furthermore,costshouldbedefinedasincludingthefull
intrinsicbusinessvaluenotjusttherecordedaccountingvalueofallconsiderationgiven,irrespectiveof
marketpricesofthesecuritiesinvolvedatthetimeofmergerandirrespectiveofwhetherpoolingtreatment
wasallowed.Forexample,whatwetrulypaidintheBlueChipmergerfor40%oftheGoodwillofSeesand
theNewswasconsiderablymorethanthe$51.7millionenteredonourbooks.Thisdisparityexistsbecausethe
marketvalueoftheBerkshiresharesgivenupinthemergerwaslessthantheirintrinsicbusinessvalue,which
isthevaluethatdefinesthetruecosttous.
Operationsthatappeartobewinnersbaseduponperspective(1)maypalewhenviewedfromperspective(2).Agoodbusiness
isnotalwaysagoodpurchasealthoughitsagoodplacetolookforone.

We will try to acquire businesses that have excellent operating economics measured by (1) and that provide reasonable
returnsmeasuredby(2).Accountingconsequenceswillbetotallyignored.
Atyearend1983,netGoodwillonouraccountingbookstotaled$62million,consistingofthe$79millionyouseestatedon
the asset side of our balance sheet, and $17 million of negative Goodwill that is offset against the carrying value of our
interestinMutualSavingsandLoan.
WebelieveneteconomicGoodwillfarexceedsthe$62millionaccountingnumber.
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