Warren Buffett Shareholder letter 1997

8/13/2019 Warren Buffett Shareholder letter 1997

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BERKSHIRE HATHAWAY INC.

1997 Chairman's Letter

To the Shareholers o! Ber"shire Hatha#a$ In%.&

Our gain in net worth during 1997 was $8.0 billion, which increased the per-sharebook value of both our lass ! and lass " stock b# %.1&. Over the last #ears'that is, since present (anage(ent took over) per-share book value has grown fro($19 to $*+,%88, a rate of *%.1& co(pounded annuall#. '1)

1. All figures used in this report apply to Berkshire's Ashares,

the successor to the only stock that the company had

outstanding

before 1996. The B shares have an economic interest eual

to 1!"#th

that of the A.

iven our gain of %.1&, it is te(pting to declare victor# and (ove on. "ut last#ears perfor(ance was no great triu(phAnyinvestor can chalk up large returnswhen stocks soar, as the# did in 1997. /n a bull (arket, one (ust avoid the error ofthe preening duck that uacks boastfull# after a torrential rainstor(, thinking that its

paddling skills have caused it to rise in the world. ! right-thinking duck wouldinstead co(pare its position after the downpour to that of the other ducks on the pond.

o whats our duck rating for 19972 3he table on the facing page shows thatthough we paddled furiousl# last #ear, passive ducks that si(pl# invested in the 45/nde6 rose al(ost as fast as we did. Our appraisal of 1997s perfor(ance, then uack.

hen the (arket boo(s, we tend to suffer in co(parison with the 45 /nde6.3he /nde6 bears no ta6 costs, nor do (utual funds, since the# pass through all ta6liabilities to their owners. ast #ear, on the other hand, "erkshire paid or accrued $%.*

billion for federal inco(e ta6, or about 18& of our beginning net worth.

"erkshire will alwa#s have corporate ta6es to pa#, which (eans it needs tooverco(e their drag in order to :ustif# its e6istence. Obviousl#, harlie ;unger,"erkshires


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ains in book value are, of course, not the botto( line at "erkshire. hat trul#counts are gains in per-share intrinsic business value. Ordinaril#, though, the two(easures tend to (ove roughl# in tande(, and in 1997 that was the case ed b# a

blow-out perfor(ance at >/O, "erkshires intrinsic value 'which far e6ceeds bookvalue) grew at nearl# the sa(e pace as book value.

?or (ore e6planation of the ter(, intrinsic value, #ou (a# wish to refer to ourOwners ;anual, reprinted on pages @* to 71. 3his (anual sets forth our owner-related business principles, infor(ation that is i(portant to all of "erkshiresshareholders.

/n our last two annual reports, we furnished #ou a table that harlie and / believeis central to esti(ating "erkshires intrinsic value. /n the updated version of that table,which follows, we trace our two ke# co(ponents of value. 3he first colu(n lists our

per-share ownership of invest(ents 'including cash and euivalents) and the secondcolu(n shows our per-share earnings fro( "erkshires operating businesses before

ta6es and purchase-accounting ad:ust(ents 'discussed on pages @9 and 70), but afterall interest and corporate e6penses. 3he second colu(n e6cludes all dividends,interest and capital gains that we realiAed fro( the invest(ents presented in the firstcolu(n. /n effect, the colu(ns show what "erkshire would look like were it split intotwo parts, with one entit# holding our invest(ents and the other operating all of our

businesses and bearing all corporate costs.

$re%ta& arnings $er (hare

)nvestments &cluding All )ncome from

*ear $er (hare )nvestments

196+ -1 1.#9

19++ "+ 1.--

19/+ ",91# 1#/.1-

199+ "/,#-" +1+./

5undits who ignore what our 8,000 e(plo#ees contribute to the co(pan#, andinstead si(pl# view "erkshire as a de facto invest(ent co(pan#, should stud# thefigures in the second colu(n. e (ade our first business acuisition in 19@7, andsince then our pre-ta6 operating earnings have grown fro( $1 (illion to $888 (illion.?urther(ore, as noted, in this e6ercise we have assigned all of "erkshires corporatee6penses -- overhead of $@.@ (illion, interest of $@@.9 (illion and shareholdercontributions of $1+.% (illion -- to our business operations, even though a portion ofthese could :ust as well have been assigned to the invest(ent side.

Bere are the growth rates of the two seg(ents b# decade

$re%ta& arnings $er

(hare

)nvestments &cluding All )ncome

from

0ecade nding $er (hare )nvestments

19++ -.6 +.6


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19/+ 6.2 -.1

199+ 2.2 #./

Annual 3ro4th

5ate, 196+%199+ 2.6 -.

Curing 1997, both parts of our business grew at a satisfactor# rate, withinvest(ents increasing b# $9,+% per share, or .+&, and operating earningsgrowing b# $*9@.% per share, or 70.&. One i(portant caveat "ecause we wereluck# in our super-cat insurance business 'to be discussed later) and because >/Osunderwriting gain was well above what we can e6pect in (ost #ears, our 1997operating earnings were (uch better than we anticipated and also (ore than wee6pect for 1998.

Our rate of progress in both invest(ents and operations is certainto fall in thefuture. ?or an#one deplo#ing capital, nothing recedes like success. ;# own histor#(akes the point "ack in 19+1, when / was attending "en raha(s class atolu(bia, an idea giving (e a $10,000 gain i(proved (# invest(ent perfor(ancefor the #ear b# a full 100 percentage points. 3oda#, an idea producing a $+00 (illion

pre-ta6 profit for "erkshire adds onepercentage point to our perfor(ance. /ts nowonder that (# annual results in the 19+0s were better b# nearl# thirt# percentage

points than (# annual gains in an# subseuent decade. harlies e6perience wassi(ilar. e werent s(arter then, :ust s(aller. !t our present siAe, an# perfor(ancesuperiorit# we achieve will be (inor.

e will be helped, however, b# the fact that the businesses to which we havealread# allocated capital -- both operating subsidiaries and co(panies in which we are

passive investors -- have splendid long-ter( prospects. e are also blessed with a(anagerial corps that is unsurpassed in abilit# and focus. ;ost of these e6ecutives arewealth# and do not need the pa# the# receive fro( "erkshire to (aintain their wa# oflife. 3he# are (otivated b# the :o# of acco(plish(ent, not b# fa(e or fortune.

3hough we are delighted with what we own, we are not pleased with ourprospects for co((itting inco(ing funds. 5rices are high for both businesses andstocks. 3hat does not (ean that the prices of either will fall -- we have absolutel# noview on that (atter -- but it does (ean that we get relativel# little in prospective

earnings when we co((it fresh (one#.

Dnder these circu(stances, we tr# to e6ert a 3ed illia(s kind of discipline. /nhis book The Science of Hitting, 3ed e6plains that he carved the strike Aone into 77cells, each the siAe of a baseball. winging onl# at balls in his =best= cell, he knew,would allow hi( to bat .%00E reaching for balls in his =worst= spot, the low outsidecorner of the strike Aone, would reduce hi( to .*0. /n other words, waiting for the fat

pitch would (ean a trip to the Ball of ?a(eE swinging indiscri(inatel# would (ean aticket to the (inors.

/f the# are in the strike Aone at all, the business =pitches= we now see are :ustcatching the lower outside corner. /f we swing, we will be locked into low returns.


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"ut if we let all of toda#s balls go b#, there can be no assurance that the ne6t ones wesee will be (ore to our liking. 5erhaps the attractive prices of the past were theaberrations, not the full prices of toda#. Dnlike 3ed, we cant be called out if we resistthree pitches that are barel# in the strike AoneE nevertheless, :ust standing there, da#after da#, with (# bat on (# shoulder is not (# idea of fun.

n%on(entional Commitments

hen we cant find our favorite co((it(ent -- a well-run and sensibl#-pricedbusiness with fine econo(ics -- we usuall# opt to put new (one# into ver# short-ter(instru(ents of the highest ualit#. o(eti(es, however, we venture elsewhere.Obviousl# we believe that the alternative co((it(ents we (ake are (ore likel# toresult in profit than loss. "ut we also realiAe that the# do not offer the certaint# of

profit that e6ists in a wonderful business secured at an attractive price. ?inding that

kind of opportunit#, we knowthat we are going to (ake (one# -- the onl# uestionbeing when. ith alternative invest(ents, we thinkthat we are going to (ake (one#."ut we also recogniAe that we will so(eti(es realiAe losses, occasionall# ofsubstantial siAe.

e had three non-traditional positions at #earend. 3he first was derivativecontracts for 1%.0 (illion barrels of oil, that being what was then left of a %+.7 (illion

barrel position we established in 199%-9+. ontracts for 1.7 (illion barrels weresettled in 199+-97, and these supplied us with a pre-ta6 gain of about [email protected] (illion.Our re(aining contracts e6pire during 1998 and 1999. /n these, we had an unrealiAedgain of $11.@ (illion at #earend. !ccounting rules reuire that co((odit# positions

be carried at (arket value. 3herefore, both our annual and uarterl# financialstate(ents reflect an# unrealiAed gain or loss in these contracts. hen we establishedour contracts, oil for future deliver# see(ed (odestl# underpriced. 3oda#, though, wehave no opinion as to its attractiveness.

Our second non-traditional co((it(ent is in silver. ast #ear, we purchased111.* (illion ounces. ;arked to (arket, that position produced a pre-ta6 gain of$97.% (illion for us in 1997. /n a wa#, this is a return to the past for (e 3hirt# #earsago, / bought silver because / anticipated its de(onetiAation b# the D.. overn(ent.>ver since, / have followed the (etals funda(entals but not owned it. /n recent #ears,

bullion inventories have fallen (ateriall#, and last su((er harlie and / concludedthat a higher price would be needed to establish euilibriu( between suppl# andde(and. /nflation e6pectations, it should be noted, pla# no part in our calculation ofsilvers value.

?inall#, our largest non-traditional position at #earend was $%.@ billion, ata(ortiAed cost, of long-ter( Aero-coupon obligations of the D.. 3reasur#. 3hesesecurities pa# no interest. /nstead, the# provide their holders a return b# wa# of thediscount at which the# are purchased, a characteristic that (akes their (arket prices(ove rapidl# when interest rates change. /f rates rise, #ou lose heavil# with Aeros, andif rates fall, #ou (ake outsiAed gains. ince rates fell in 1997, we ended the #ear with

an unrealiAed pre-ta6 gain of $+98.8 (illion in our Aeros. "ecause we carr# thesecurities at (arket value, that gain is reflected in #earend book value.


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/n purchasing Aeros, rather than sta#ing with cash-euivalents, we risk lookingver# foolish ! (acro-based co((it(ent such as this never has an#thing close to a100& probabilit# of being successful. Bowever, #ou pa# harlie and (e to use our

best :udg(ent -- not to avoid e(barrass(ent -- and we will occasionall# (ake anunconventional (ove when we believe the odds favor it. 3r# to think kindl# of us

when we blow one. !long with 5resident linton, we will be feeling #our pain 3he;unger fa(il# has (ore than 90& of its net worth in "erkshire and the "uffetts (orethan 99&.

Ho# We Thin" A)o*t +ar"et ,l*%t*ations

! short uiA /f #ou plan to eat ha(burgers throughout #our life and are not acattle producer, should #ou wish for higher or lower prices for beef2 ikewise, if #ouare going to bu# a car fro( ti(e to ti(e but are not an auto (anufacturer, should #ou

prefer higher or lower car prices2 3hese uestions, of course, answer the(selves.

"ut now for the final e6a( /f #ou e6pect to be a net saver during the ne6t five#ears, should #ou hope for a higher or lower stock (arket during that period2 ;an#investors get this one wrong. >ven though the# are going to be net bu#ers of stocksfor (an# #ears to co(e, the# are elated when stock prices rise and depressed whenthe# fall. /n effect, the# re:oice because prices have risen for the =ha(burgers= the#will soon be bu#ing. 3his reaction (akes no sense. Onl# those who will be sellers ofeuities in the near future should be happ# at seeing stocks rise. 5rospective

purchasers should (uch prefer sinking prices.

?or shareholders of "erkshire who do not e6pect to sell, the choice is evenclearer. 3o begin with, our owners are auto(aticall# saving even if the# spend ever#di(e the# personall# earn "erkshire =saves= for the( b# retaining all earnings,thereafter using these savings to purchase businesses and securities. learl#, the (orecheapl# we (ake these bu#s, the (ore profitable our owners indirect savings

progra( will be.

?urther(ore, through "erkshire #ou own (a:or positions in co(panies thatconsistentl# repurchase their shares. 3he benefits that these progra(s suppl# us growas prices fall hen stock prices are low, the funds that an investee spends on

repurchases increase our ownership of that co(pan# b# a greater a(ount than is thecase when prices are higher. ?or e6a(ple, the repurchases that oca-ola, 3heashington 5ost and ells ?argo (ade in past #ears at ver# low prices benefitted"erkshire far (ore than do toda#s repurchases, (ade at loftier prices.

!t the end of ever# #ear, about 97& of "erkshires shares are held b# the sa(einvestors who owned the( at the start of the #ear. 3hat (akes the( savers. 3he#should therefore re:oice when (arkets decline and allow both us and our investees todeplo# funds (ore advantageousl#.

o s(ile when #ou read a headline that sa#s =/nvestors lose as (arket falls.= >dit

it in #our (ind to =Disinvestors lose as (arket falls -- but investors gain.= 3houghwriters often forget this truis(, there is a bu#er for ever# seller and what hurts one


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necessaril# helps the other. '!s the# sa# in golf (atches =>ver# putt (akessomeonehapp#.=)

e gained enor(ousl# fro( the low prices placed on (an# euities andbusinesses in the 1970s and 1980s. ;arkets that then were hostile to invest(ent

transients were friendl# to those taking up per(anent residence. /n recent #ears, theactions we took in those decades have been validated, but we have found few newopportunities. /n its role as a corporate =saver,= "erkshire continuall# looks for wa#sto sensibl# deplo# capital, but it (a# be so(e ti(e before we find opportunities thatget us trul# e6cited.

Ins*ran%e -erations // -(er(ie#

hat does e6cite us, however, is our insurance business. >/O is fl#ing, and

we e6pect that it will continue to do so. "efore we e6pound on that, though, letsdiscuss =float= and how to (easure its cost. Dnless #ou understand this sub:ect, it will

be i(possible for #ou to (ake an infor(ed :udg(ent about "erkshires intrinsicvalue.

3o begin with, float is (one# we hold but dont own. /n an insurance operation,float arises because pre(iu(s are received before losses are paid, an interval thatso(eti(es e6tends over (an# #ears. Curing that ti(e, the insurer invests the (one#.3#picall#, this pleasant activit# carries with it a downside 3he pre(iu(s that aninsurer takes in usuall# do not cover the losses and e6penses it eventuall# (ust pa#.3hat leaves it running an =underwriting loss,= which is the cost of float. !n insurance

business has value if its cost of float over ti(e is less than the cost the co(pan#would otherwise incur to obtain funds. "ut the business is a le(on if its cost of float ishigher than (arket rates for (one#.

! caution is appropriate here "ecause loss costs (ust be esti(ated, insurers haveenor(ous latitude in figuring their underwriting results, and that (akes it ver#difficult for investors to calculate a co(pan#s true cost of float. >sti(ating errors,usuall# innocent but so(eti(es not, can be huge. 3he conseuences of these(iscalculations flow directl# into earnings. !n e6perienced observer can usuall#

detect large-scale errors in reserving, but the general public can t#picall# do no (orethan accept whats presented, and at ti(es / have been a(aAed b# the nu(bers that

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

!s the nu(bers in the following table show, "erkshires insurance business hasbeen a huge winner. ?or the table, we have calculated our float -- which we generatein large a(ounts relative to our pre(iu( volu(e -- b# adding net loss reserves, lossad:ust(ent reserves, funds held under reinsurance assu(ed and unearned pre(iu(reserves, and then subtracting agents balances, prepaid acuisition costs, prepaid

ta6es and deferred charges applicable to assu(ed reinsurance. Our cost of float isdeter(ined b# our underwriting loss or profit. /n those #ears when we have had an


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underwriting profit, such as the last five, our cost of float has been negative. /n effect,we have been paid for holding (one#.

17 7 *earend

*ield 8nder4riting Appro&imate on ong%

Term

oss Average :loat ;ost of :unds 3ovt.

Bonds

)n


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also believe that our cost of float will continue to be highl# favorable.

S*er/Cat Ins*ran%e

Occasionall#, however, the cost of our float will spike severel#. 3hat will occurbecause of our heav# involve(ent in the super-cat business, which b# its nature is the(ost volatile of all insurance lines. /n this operation, we sell policies that insuranceand reinsurance co(panies purchase in order to li(it their losses when (ega-catastrophes strike. "erkshire is the preferred (arket for sophisticated bu#ers henthe =big one= hits, the financial strength of super-cat writers will be tested, and"erkshire has no peer in this respect.

ince trul# (a:or catastrophes are rare occurrences, our super-cat business can bee6pected to show large profits in (ost #ears -- and to record a huge loss occasionall#.

/n other words, the attractiveness of our super-cat business will take a great (an##ears to (easure. What you must understand, however, is that a truly terrible year inthe super-cat business is not a possibility -- its a certainty! The only "uestion is when

it will come!

ast #ear, we were ver# luck# in our super-cat operation. 3he world suffered nocatastrophes that caused huge a(ounts of insured da(age, so virtuall# all pre(iu(sthat we received dropped to the botto( line. 3his pleasant result has a dark side,however. ;an# investors who are =innocents= -- (eaning that the# rel# onrepresentations of salespeople rather than on underwriting knowledge of their own --have co(e into the reinsurance business b# (eans of purchasing pieces of paper thatare called =catastrophe bonds.= 3he second word in this ter(, though, is an Orwellian(isno(er ! true bond obliges the issuer to pa#E these bonds, in effect, are contractsthat la# a provisional pro(ise to pa# on thepurchaser.

3his convoluted arrange(ent ca(e into being because the pro(oters of thecontracts wished to circu(vent laws that prohibit the writing of insurance b# entitiesthat havent been licensed b# the state. ! side benefit for the pro(oters is that callingthe insurance contract a =bond= (a# also cause unsophisticated bu#ers to assu(e thatthese instru(ents involve far less risk than is actuall# the case.

3rul# outsiAed risks will e6ist in these contracts if the# are not properl# priced. !pernicious aspect of catastrophe insurance, however, (akes it likel# that (ispricing,even of a severe variet#, will not be discovered for a ver# long ti(e. onsider, fore6a(ple, the odds of throwing a 1* with a pair of dice -- 1 out of @. Fow assu(e thatthe dice will be thrown once a #earE that #ou, the =bond-bu#er,= agree to pa# $+0(illion if a 1* appearsE and that for =insuring= this risk #ou take in an annual=pre(iu(= of $1 (illion. 3hat would (ean #ou had significantl# underpriced the risk.

Fevertheless, #ou could go along for #ears thinking #ou were (aking (one# --indeed, eas# (one#. 3here is actuall# a 7+.%& probabilit# that #ou would go for adecade without pa#ing out a di(e. >ventuall#, however, #ou would go broke.

/n this dice e6a(ple, the odds are eas# to figure. alculations involving (onsterhurricanes and earthuakes are necessaril# (uch fuAAier, and the best we can do at


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"erkshire is to esti(ate a range of probabilities for such events. 3he lack of precisedata, coupled with the rarit# of such catastrophes, pla#s into the hands of pro(oters,who t#picall# e(plo# an =e6pert= to advise the potential bond-bu#er about the

probabilit# of losses. 3he e6pert puts no (one# on the table. /nstead, he receives anup-front pa#(ent that is forever his no (atter how inaccurate his predictions.

urprise hen the stakes are high, an e6pert can invariabl# be found who will affir(-- to return to our e6a(ple -- that the chance of rolling a 1* is not 1 in @, but (orelike 1 in 100. '/n fairness, we should add that the e6pert will probabl# believe that hisodds are correct, a fact that (akes hi( less reprehensible -- but (ore dangerous.)

3he influ6 of =investor= (one# into catastrophe bonds -- which (a# well live upto their na(e -- has caused super-cat prices to deteriorate (ateriall#. 3herefore, wewill write less business in 1998. e have so(e large (ulti-#ear contracts in force,however, that will (itigate the drop. 3he largest of these are two policies that wedescribed in last #ears report -- one covering hurricanes in ?lorida and the other,signed with the alifornia >arthuake !uthorit#, covering earthuakes in that state.

Our =worst-case= loss re(ains about $@00 (illion after-ta6, the (a6i(u( we couldlose under the >! polic#. 3hough this loss potential (a# sound large, it is onl#about 1& of "erkshires (arket value. /ndeed, if we could get appropriate prices, wewould be willing to significantl# increase our =worst-case= e6posure.

Our super-cat business was developed fro( scratch b# !:it Gain, who hascontributed to "erkshires success in a variet# of other wa#s as well. !:it possesses

both the discipline to walk awa# fro( business that is inadeuatel# priced and thei(agination to then find other opportunities. uite si(pl#, he is one of "erkshires(a:or assets. !:it would have been a star in whatever career he choseE fortunatel# forus, he en:o#s insurance.

Ins*ran%e // 0EIC- 1/233/444/5746 an -ther 8rimar$ -erations

ast #ear / wrote about >/Os 3on# Ficel# and his terrific (anage(ent skills./f / had known then what he had in store for us in 1997, / would have searched forstill greater superlatives. 3on#, now +%, has been with >/O for @ #ears and last#ear was his best. !s >O, he has trans(itted vision, energ# and enthusias( to all(e(bers of the >/O fa(il# -- raising their sights fro( what hasbeen achieved to

what canbe achieved.

e (easure >/Os perfor(ance b# first, the net increase in its voluntar# autopolicies 'that is, not including policies assigned us b# the state) and, second, theprofitabilit# of =seasoned= auto business, (eaning policies that have been with us for(ore than a #ear and are thus past the period in which acuisition costs cause the( to

be (one#-losers. /n 199@, in-force business grew 10&, and / told #ou how pleased /was, since that rate was well above an#thing we had seen in two decades. 3hen, in1997, growth :u(ped to 1@&.

"elow are the new business and in-force figures for the last five #ears


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>e4 ?oluntary ?oluntary Auto

*ears Auto $olicies $olicies in :orce

199" "2-,// ,#11,#22

199- "96,1+ ,1-+,2-9

1992 -61,6#/ ,"1#,#"+

1996 61+,669 ,2-",699 199+ 91",1+6 ,9-9,-"9

Of course, an# insurer can grow rapidl# if it gets careless about underwriting.>/Os underwriting profit for the #ear, though, was 8.1& of pre(iu(s, far aboveits average. /ndeed, that percentage was higher than we wish it to be Our goal is to

pass on (ost of the benefits of our low-cost operation to our custo(ers, holdingourselves to about %& in underwriting profit. ith that in (ind, we reduced ouraverage rates a bit during 1997 and (a# well cut the( again this #ear. Our ratechanges varied, of course, depending on the polic#holder and where he livesE westrive to charge a rate that properl# reflects the loss e6pectanc# of each driver.

>/O is not the onl# auto insurer obtaining favorable results these da#s. ast#ear, the industr# recorded profits that were far better than it anticipated or cansustain. /ntensified co(petition will soon sueeAe (argins ver# significantl#. "ut thisis a develop(ent we welco(e ong ter(, a tough (arket helps the low-costoperator, which is what we are and intend to re(ain.

ast #ear / told #ou about the record [email protected]& profit-sharing contribution that>/Os associates had earned and e6plained that two si(ple variables set thea(ount polic# growth and profitabilit# of seasoned business. / further e6plained that199@s perfor(ance was so e6traordinar# that we had to enlarge the chart delineating

the possible pa#outs. 3he new configuration didnt (ake it through 1997 eenlarged the charts boundaries again and awarded our 10,+00 associates a profit-sharing contribution a(ounting to *@.9& of their base co(pensation, or $71 (illion./n addition, the sa(e two variables -- polic# growth and profitabilit# of seasoned

business -- deter(ined the cash bonuses that we paid to doAens of top e6ecutives,starting with 3on#.

!t >/O, we are pa#ing in a wa# that (akes sense for both our owners and our(anagers. e distribute (erit badges, not lotter# tickets /n none of "erkshiressubsidiaries do we relate co(pensation to our stock price, which our associates cannot

affect in an# (eaningful wa#. /nstead, we tie bonuses to each units businessperfor(ance, which is the direct product of the units people. hen that perfor(anceis terrific -- as it has been at >/O -- there is nothing harlie and / en:o# (ore thanwriting a big check.

>/Os underwriting profitabilit# will probabl# fall in 1998, but the co(pan#sgrowth could accelerate. ere planning to step on the gas >/Os (arketinge6penditures this #ear will top $100 (illion, up +0& fro( 1997. Our (arket sharetoda# is onl# &, a level of penetration that should increase dra(aticall# in the ne6tdecade. 3he auto insurance industr# is huge -- it does about $11+ billion of volu(e

annuall# -- and there are tens of (illions of drivers who would save substantial (one#b# switching to us.


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H H H H H H H H H H H H

/n the 199+ report, / described the enor(ous debt that #ou and / owe to ori(erCavidson. On a aturda# earl# in 19+1, he patientl# e6plained the ins and outs of both>/O and its industr# to (e -- a *0-#ear-old stranger whod arrived at >/Os

headuarters uninvited and unannounced. Cav# later beca(e the co(pan#s >O andhas re(ained (# friend and teacher for %7 #ears. 3he huge rewards that >/O hasheaped on "erkshire would not have (aterialiAed had it not been for his generosit#and wisdo(. /ndeed, had / not (et Cav#, / (ight never have grown to understand thewhole field of insurance, which over the #ears has pla#ed such a ke# part in"erkshires success.

Cav# turned 9+ last #ear, and its difficult for hi( to travel. Fevertheless, 3on#and / hope that we can persuade hi( to attend our annual (eeting, so that ourshareholders can properl# thank hi( for his i(portant contributions to "erkshire.ish us luck.


3hough the# are, of course, far s(aller than >/O, our other pri(ar# insuranceoperations turned in results last #ear that, in aggregate, were full# as stunning.

Fational /nde(nit#s traditional business had an underwriting profit of *.9& and, asusual, developed a large a(ount of float co(pared to pre(iu( volu(e. Over the lastthree #ears, this seg(ent of our business, run b# Con urster, has had a profit of*%.&. Our ho(estate operation, (anaged b# Iod >ldred, recorded an underwriting

profit of 1%.1& even though it continued to absorb the e6penses of geographicale6pansion. Iods three-#ear record is an a(aAing 1+.1&. "erkshires workersco(pensation business, run out of alifornia b# "rad Jinstler, had a (odestunderwriting loss in a difficult environ(entE its three-#ear underwriting record is a

positive 1.+&. Gohn JiAer, at entral tates /nde(nit#, set a new volu(e record whilegenerating good underwriting earnings. !t Jansas "ankers uret#, Con 3owle (orethan lived up to the high e6pectations we had when we purchased the co(pan# in199@.

/n aggregate, these five operations recorded an underwriting profit of 1+.0&. 3hetwo Cons, along with Iod, "rad and Gohn, have created significant value for"erkshire, and we believe there is (ore to co(e.

So*r%es o! Reorte Earnins

3he table that follows shows the (ain sources of "erkshires reported earnings. /nthis presentation, purchase-accounting ad:ust(ents are not assigned to the specific

businesses to which the# appl#, but are instead aggregated and shown separatel#. 3hisprocedure lets #ou view the earnings of our businesses as the# would have beenreported had we not purchased the(. ?or the reasons discussed on pages @9 and 70,this for( of presentation see(s to us to be (ore useful to investors and (anagers than

one utiliAing generall#-accepted accounting principles '!!5), which reuirepurchase-pre(iu(s to be charged off business-b#-business. 3he total earnings we


12/25

show in the table are, of course, identical to the !!5 total in our audited financialstate(ents.

(in

millions)

Berkshire's Share

of

Net Earnings

(after taxes and

Pre-Tax Earnings

minority interests)

1997 199

1997 199

@perating arnings

)nsurance 3roup

8nder4riting %% (uper%;at. . . . . . . . /".# 16+.#

1/.+ 1#+.-

8nder4riting %% @ther 5einsurance. . . . 122.7 1+-./7

1##.17 11.-7

8nder4riting %% 3);@. . . . . . . . . . /#.+ 1+1.-

1/1.1 11#.

8nder4riting %% @ther $rimary. . . . . . 2.9 2/.2

"-.1 "+.6

>et )nvestment )ncome. . . . . . . . . . //." +6.

+#".6 29".1

Buffalo >e4s . . . . . . . . . . . . . . . 22.9 2#.-

".+ 9.2

:inance Businesses . . . . . . . . . . . . /.1 ".1

1/.# 1-.9

:light(afety . . . . . . . . . . . . . . . 1"9.2 ".117

/-.- 1.917 ome :urnishings . . . . . . . . . . . . . 26./7 -"./

".7 -./

Ce4elry. . . . . . . . . . . . . . . . . . "1.6 +./

1/." 16.1

(cott :et=ere&cluding finance operation7. 11/.9 11.+

++." /1.6

(ee's ;andies. . . . . . . . . . . . . . . 2/.6 21.9

"2.# "#./

(hoe 3roup . . . . . . . . . . . . . . . . -/./ 61.6

". -1.#

$urchase%Accounting AdDustments. . . . . . 1#-.97 +2.+7

9+.#7 +#.27

)nterest &pense"7. . . . . . . . . . . . 1#6.67 9-."76+.17 26.67

(hareholder%0esignated ;ontributions . . . 12.-7 1"."7

9.97 /.27

@ther. . . . . . . . . . . . . . . . . . . 6#.+ +".#

"+.# -.

%%%%%%%% %%%%%%%%

%%%%%%%% %%%%%%%%

@perating arnings . . . . . . . . . . . . . 1,+12.+ 1,1.-

1,19-.2 //".1

;apital 3ains from )nvestments . . . . . . . 1,111.9 ,-/-.2

+#+.1 1,6#2.2

%%%%%%%% %%%%%%%%

%%%%%%%% %%%%%%%%


13/25

Total arnings % All ntities. . . . . . . .,/+.6 ",+#2.9

1,9#1.6 ,-//.6

EEEEEEEE EEEEEEEE

EEEEEEEE EEEEEEEE

#$%&rom date of ac"uisition, December '(, $))*!

#'%+ncludes Star &urniture from uly $, $))! #(%./cludes interest e/pense of &inance 0usinesses!

Overall, our operating businesses continue to perfor( e6ceptionall# well, faroutdoing their industr# nor(s. e are particularl# pleased that profits i(proved atBelAbergs after a disappointing 199@. Geff o((ent, BelAbergs >O, took decisivesteps earl# in 1997 that enabled the co(pan# to gain real (o(entu( b# the crucialhrist(as season. /n the earl# part of this #ear, as well, sales re(ained strong.

asual observers (a# not appreciate :ust how e6traordinar# the perfor(ance of(an# of our businesses has been /f the earnings histor# of, sa#, "uffalo Fews orcott ?etAer is co(pared to the records of their publicl#-owned peers, their

perfor(ance (ight see( to have been une6ceptional. "ut (ost public co(paniesretain two-thirds or (ore of their earnings to fund their corporate growth. /n contrast,those "erkshire subsidiaries have paid 100& of their earnings to us, their parentco(pan#, to fund ourgrowth.

/n effect, the records of the public co(panies reflect the cu(ulative benefits ofthe earnings the# have retained, while the records of our operating subsidiaries get no

such boost. Over ti(e, however, the earnings these subsidiaries have distributed havecreated trul# huge a(ounts of earning power elsewhere in "erkshire. 3he Fews, eesand cott ?etAer have alone paid us $1.8 billion, which we have gainfull# e(plo#edelsewhere. e owe their (anage(ents our gratitude for (uch (ore than the earningsthat are detailed in the table.

!dditional infor(ation about our various businesses is given on pages @ - +0,where #ou will also find our seg(ent earnings reported on a !!5 basis. /n addition,on pages ++ - @1, we have rearranged "erkshires financial data into four seg(ents ona non-!!5 basis, a presentation that corresponds to the wa# harlie and / think

about the co(pan#. Our intent is to suppl# #ou with the financial infor(ation that wewould wish #ou to give us if our positions were reversed.

Loo"/Thro*h Earnins

Ieported earnings are a poor (easure of econo(ic progress at "erkshire, in partbecause the nu(bers shown in the table presented earlier include onl# the dividendswe receive fro( investees -- though these dividends t#picall# represent onl# a s(allfraction of the earnings attributable to our ownership. Fot that we (ind this division

of (one#, since on balance we regard the undistributed earnings of investees as (orevaluable to us than the portion paid out. 3he reason is si(ple Our investees often


14/25

have the opportunit# to reinvest earnings at high rates of return. o wh# should wewant the( paid out2

3o depict so(ething closer to econo(ic realit# at "erkshire than reportedearnings, though, we e(plo# the concept of =look-through= earnings. !s we calculate

these, the# consist of '1) the operating earnings reported in the previous section, plusE'*) our share of the retained operating earnings of (a:or investees that, under !!5accounting, are not reflected in our profits, lessE ') an allowance for the ta6 thatwould be paid b# "erkshire if these retained earnings of investees had instead beendistributed to us. hen tabulating =operating earnings= here, we e6clude purchase-accounting ad:ust(ents as well as capital gains and other (a:or non-recurring ite(s.

3he following table sets forth our 1997 look-through earnings, though / warn #outhat the figures can be no (ore than appro6i(ate, since the# are based on a nu(ber of

:udg(ent calls. '3he dividends paid to us b# these investees have been included in theoperating earnings ite(iAed on page 11, (ostl# under =/nsurance roup Fet

/nvest(ent /nco(e.=)

Berkshire's

(hare

of

8ndistributed

Berkshire's Appro&imate @perating

arnings

Berkshire's


15/25

/n 1997, we agreed to acuire tar ?urniture and /nternational Cair# ueen 'adeal that closed earl# in 1998). "oth businesses full# (eet our criteria 3he# areunderstandableE possess e6cellent econo(icsE and are run b# outstanding people.

3he tar transaction has an interesting histor#. henever we bu# into an industr#

whose leading participants arent known to (e, / alwa#s ask our new partners, =!rethere an# (ore at ho(e like #ou2= Dpon our purchase of Febraska ?urniture ;art in198, therefore, the "lu(kin fa(il# told (e about three outstanding furniture retailersin other parts of the countr#. !t the ti(e, however, none was for sale.

;an# #ears later, /rv "lu(kin learned that "ill hild, >O of I.. ille# -- oneof the reco((ended three -- (ight be interested in (erging, and we pro(ptl# (adethe deal described in the 199+ report. e have been delighted with that association --"ill is the perfect partner. ?urther(ore, when we asked "ill about industr# standouts,he ca(e up with the re(aining two na(es given (e b# the "lu(kins, one of these

being tar ?urniture of Bouston. "ut ti(e went b# without there being an# indication

that either of the two was available.

On the 3hursda# before last #ears annual (eeting, however, "ob Cenha( ofalo(on told (e that ;elv#n olff, the long-ti(e controlling shareholder and >Oof tar, wanted to talk. !t our invitation, ;elv#n ca(e to the (eeting and spent histi(e in O(aha confir(ing his positive feelings about "erkshire. /, (eanwhile, lookedat tars financials, and liked what / saw.

! few da#s later, ;elv#n and / (et in Few Kork and (ade a deal in a single,two-hour session. !s was the case with the "lu(kins and "ill hild, / had no need tocheck leases, work out e(plo#(ent contracts, etc. / knew / was dealing with a (an ofintegrit# and thats what counted.

3hough the olff fa(il#s association with tar dates back to 19*%, the businessstruggled until ;elv#n and his sister hirle# 3oo(in took over in 19@*. 3oda# taroperates 1* stores -- ten in Bouston and one each in !ustin and "r#an -- and will soon(ove into an !ntonio as well. e wont be surprised if tar is (an# ti(es its

present siAe a decade fro( now.

Beres a stor# illustrating what ;elv#n and hirle# are like hen the# told theirassociates of the sale, the# also announced that tar would (ake large, special

pa#(ents to those who had helped the( succeed -- and then defined that group asever#one in the business. Dnder the ter(s of our deal, it was ;elv#n and hirle#s(one#, not ours, that funded this distribution. harlie and / love it when we beco(e

partners with people who behave like that.

3he tar transaction closed on Gul# 1. /n the (onths since, weve watched tarsalread#-e6cellent sales and earnings growth accelerate further. ;elv#n and hirle#will be at the annual (eeting, and / hope #ou get a chance to (eet the(.

Fe6t acuisition /nternational Cair# ueen. 3here are +,79* Cair# ueen storesoperating in * countries -- all but a handful run b# franchisees -- and in addition /C

franchises %09 Orange Gulius operations and % Jar(elkorn operations. /n 190locations, =treat centers= provide so(e co(bination of the three products.


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?or (an# #ears /C had a bu(p# histor#. 3hen, in 1970, a ;inneapolis groupled b# Gohn ;oot# and Iud# uther took control. 3he new (anagers inherited a

:u(ble of different franchising agree(ents, along with so(e unwise financingarrange(ents that had left the co(pan# in a precarious condition. /n the #ears thatfollowed, (anage(ent rationaliAed the operation, e6tended food service to (an#

(ore locations, and, in general, built a strong organiAation.

ast su((er ;r. uther died, which (eant his estate needed to sell stock. ! #earearlier, Cick Jiphart of illia( "lair 4 o., had introduced (e to Gohn ;oot# and;ike ullivan, /Cs >O, and / had been i(pressed with both (en. o, when wegot the chance to (erge with /C, we offered a proposition patterned on our?lightafet# acuisition, e6tending selling shareholders the option of choosing eithercash or "erkshire shares having a slightl# lower i((ediate value. "# tilting theconsideration as we did, we encouraged holders to opt for cash, the t#pe of pa#(entwe b# far prefer. >ven then, onl# %+& of /C shares elected cash.

harlie and / bring a (odicu( of product e6pertise to this transaction Be hasbeen patroniAing the Cair# ueens in ass ake and "e(id:i, ;innesota, for decades,and / have been a regular in O(aha. e have put our (one# where our (outh is.

A Con!ession

/ve (entioned that we strongl# prefer to use cash rather than "erkshire stock inacuisitions. ! stud# of the record will tell #ou wh# /f #ou aggregate all of our stock-onl# (ergers 'e6cluding those we did with two affiliated co(panies, CiversifiedIetailing and "lue hip ta(ps), #ou will find that our shareholders are slightl#worse off than the# would have been had / not done the transactions. 3hough it hurts(e to sa# it, when /ve issued stock, /ve cost #ou (one#.

"e clear about one thing 3his cost has notoccurred because we were (isled inan# wa# b# sellers or because the# thereafter failed to (anage with diligence andskill. On the contrar#, the sellers were co(pletel# candid when we were negotiatingour deals and have been energetic and effective ever since.

/nstead, our proble( has been that we own a trul# (arvelous collection of

businesses, which (eans that trading awa# a portion of the( for so(ething newal(ost never (akes sense. hen we issue shares in a (erger, we reduce #ourownership in all of our businesses -- partl#-owned co(panies such as oca-ola,illette and !(erican >6press, and all of our terrific operating co(panies as well. !ne6a(ple fro( sports will illustrate the difficult# we face ?or a baseball tea(,acuiring a pla#er who can be e6pected to bat .+0 is al(ost alwa#s a wonderfulevent -- e/ceptwhen the tea( (ust trade a .80 hitter to (ake the deal.

"ecause our roster is filled with .80 hitters, we have tried to pa# cash foracuisitions, and here our record has been far better. tarting with Fational /nde(nit#in 19@7, and continuing with, a(ong others, ees, "uffalo Fews, cott ?etAer and

>/O, we have acuired -- for cash -- a nu(ber of large businesses that haveperfor(ed incredibl# well since we bought the(. 3hese acuisitions have delivered


17/25

"erkshire tre(endous value -- indeed, far (ore than / anticipated when we (ade ourpurchases.

e believe that it is al(ost i(possible for us to =trade up= fro( our presentbusinesses and (anage(ents. Our situation is the opposite of a(elots ;ordred, of

who( uenevere co((ented, =3he one thing / can sa# for hi( is that he is bound to(arr# well. >ver#bod# is above hi(.= ;arr#ing well is e6tre(el# difficult for"erkshire.

o #ou can be sure that harlie and / will be ver# reluctant to issue shares in thefuture. /n those cases when we si(pl# (ust do so -- when certain shareholders of adesirable acuiree insist on getting stock -- we will include an attractive cash option inorder to te(pt as (an# of the sellers to take cash as is possible.

;erging with public co(panies presents a special proble( for us. /f we are tooffer anypre(iu( to the acuiree, one of two conditions (ust be present >ither our

own stock (ust be overvalued relative to the acuirees, or the two co(paniestogether (ust be e6pected to earn (ore than the# would if operated separatel#.Bistoricall#, "erkshire has seldo( been overvalued. /n this (arket, (oreover,undervalued acuirees are al(ost i(possible to find. 3hat other possibilit# -- s#nerg#gains -- is usuall# unrealistic, since we e6pect acuirees to operate after weve boughtthe( :ust as the# did before. Goining with "erkshire does not nor(all# raise theirrevenues nor cut their costs.

/ndeed, their reported costs 'but not their true ones) will riseafter the# are boughtb# "erkshire if the acuiree has been granting options as part of its co(pensationpackages. /n these cases, =earnings= of the acuiree have been overstated because the#have followed the standard -- but, in our view, dead wrong -- accounting practice ofignoring the cost to a business of issuing options. hen "erkshire acuires an option-issuing co(pan#, we pro(ptl# substitute a cash co(pensation plan having anecono(ic value euivalent to that of the previous option plan. 3he acuirees trueco(pensation cost is thereb# brought out of the closet and charged, as it should be,against earnings.

3he reasoning that "erkshire applies to the (erger of public co(paniesshouldbethe calculus for all bu#ers. 5a#ing a takeover pre(iu( does not (ake sense for an#

acuirer unless a) its stock is overvalued relative to the acuirees or b) the twoenterprises will earn (ore co(bined than the# would separatel#. 5redictabl#,acuirers nor(all# hew to the second argu(ent because ver# few are willing toacknowledge that their stock is overvalued. Bowever, voracious bu#ers -- the onesthat issue shares as fast as the# can print the( -- are tacitl# conceding that point.'Often, also, the# are running all treets version of a chain-letter sche(e.)

/n so(e (ergers there trul# are (a:or s#nergies -- though oftenti(es the acuirerpa#s too (uch to obtain the( -- but at other ti(es the cost and revenue benefits thatare pro:ected prove illusor#. Of one thing, however, be certain /f a >O is enthusedabout a particularl# foolish acuisition, both his internal staff and his outside advisors

will co(e up with whatever pro:ections are needed to :ustif# his stance. Onl# in fair#


18/25

tales are e(perors told that the# are naked.

Common Sto%" In(estments

"elow we present our co((on stock invest(ents. 3hose with a (arket value of(ore than $7+0 (illion are ite(iAed.

1!"#1"97

Shares $om%any $ost& arket

(dollars in millions)

-9,-26,9## American &press ;ompany 1,"9.+ -,-1-.#

##,###,### The ;oca%;ola ;ompany 1,9/.9 1",""+.2

1,26",-1- The Falt 0isney ;ompany "/1. ,1"-./

6",9++,6## :reddie /Os ou i(pson. ou independentl# runs an euit# portfolio ofnearl# $* billion that (a# at ti(es overlap the portfolio that / (anage, andoccasionall# he (akes (oves that differ fro( (ine.

3hough we dont atte(pt to predict the (ove(ents of the stock (arket, we do tr#,in a ver# rough wa#, to value it. !t the annual (eeting last #ear, with the Cow at7,071 and long-ter( 3reasur# #ields at @.89&, harlie and / stated that we did notconsider the (arket overvalued if1) interest rates re(ained where the# were or fell,and *) !(erican business continued to earn the re(arkable returns on euit# that ithad recentl# recorded. o far, interest rates have fallen -- thats one reuisite satisfied

-- and returns on euit# still re(ain e6ceptionall# high. /f the# sta# there -- and ifinterest rates hold near recent levels -- there is no reason to think of stocks as


19/25

generall# overvalued. On the other hand, returns on euit# are not a sure thing tore(ain at, or even near, their present levels.

/n the su((er of 1979, when euities looked cheap to (e, / wrote a &orbesarticle entitled =Kou pa# a ver# high price in the stock (arket for a cheer#

consensus.= !t that ti(e skepticis( and disappoint(ent prevailed, and (# point wasthat investors should be glad of the fact, since pessi(is( drives down prices to trul#attractive levels. Fow, however, we have a ver# cheer# consensus. 3hat does notnecessaril# (ean this is the wrong ti(e to bu# stocks orporate !(erica is nowearning far (ore (one# than it was :ust a few #ears ago, and in the presence of lowerinterest rates, ever# dollar of earnings beco(es (ore valuable. 3oda#s price levels,though, have (ateriall# eroded the =(argin of safet#= that "en raha( identified asthe cornerstone of intelligent investing.


/n last #ears annual report, / discussed oca-ola, our largest holding. okecontinues to increase its (arket do(inance throughout the world, but, tragicall#, ithas lost the leader responsible for its outstanding perfor(ance. Ioberto oiAueta,okes >O since 1981, died in October. !fter his death, / read ever# one of the (orethan 100 letters and notes he had written (e during the past nine #ears. 3hose(essages could well serve as a guidebook for success in both business and life.

/n these co((unications, Ioberto displa#ed a brilliant and clear strategic visionthat was alwa#s ai(ed at advancing the well-being of oke shareholders. Iobertoknew where he was leading the co(pan#, how he was going to get there, and wh# this

path (ade the (ost sense for his owners -- and, euall# i(portant, he had a burningsense of urgenc# about reaching his goals. !n e6cerpt fro( one handwritten note hesent to (e illustrates his (ind-set ="# the wa#, / have told Olguita that what sherefers to as an obsession, #ou call focus. / like #our ter( (uch better.= ike all whoknew Ioberto, / will (iss hi( enor(ousl#.

onsistent with his concern for the co(pan#, Ioberto prepared for a sea(lesssuccession long before it see(ed necessar#. Ioberto knew that Coug /vester was theright (an to take over and worked with Coug over the #ears to ensure that no(o(entu( would be lost when the ti(e for change arrived. 3he oca-ola o(pan#will be the sa(e stea(roller under Coug as it was under Ioberto.

Con(erti)le 8re!erres

3wo #ears ago, / gave #ou an update on the five convertible preferreds that wepurchased through private place(ents in the 1987-1991 period. !t the ti(e of thatearlier report, we had realiAed a s(all profit on the sale of our ha(pion /nternationalholding. 3he four re(aining preferred co((it(ents included two, illette and ?irst>(pire tate, that we had converted into co((on stock in which we had largeunrealiAed gains, and two others, D!ir and alo(on, that had been trouble-prone. !t

ti(es, the last two had (e (outhing a line fro( a countr# song =Bow can / (iss #ouif #ou wont go awa#2=


20/25

ince / delivered that report, all four holdings have grown significantl# in value.3he co((on stocks of both illette and ?irst >(pire have risen substantiall#, in linewith the co(panies e6cellent perfor(ance. !t #earend, the $@00 (illion we put intoillette in 1989 had appreciated to $%.8 billion, and the $%0 (illion we co((itted to?irst >(pire in 1991 had risen to $*@ (illion.

Our two laggards, (eanwhile, have co(e to life in a ver# (a:or wa#. /n atransaction that finall# rewarded its long-suffering shareholders, alo(on recentl#(erged into 3ravelers roup. !ll of "erkshires shareholders -- including (e, ver#

personall# -- owe a huge debt to Cer#ck ;aughan and "ob Cenha( for, first, pla#ingke# roles in saving alo(on fro( e6tinction following its 1991 scandal and, second,restoring the vitalit# of the co(pan# to a level that (ade it an attractive acuisitionfor 3ravelers. / have often said that / wish to work with e6ecutives that / like, trustand ad(ire. Fo two fit that description better than Cer#ck and "ob.

"erkshires final results fro( its alo(on invest(ent wont be tallied for so(eti(e, but it is safe to sa# that the# will be far better than / anticipated two #ears ago.ooking back, / think of (# alo(on e6perience as having been both fascinating andinstructional, though for a ti(e in 1991-9* / felt like the dra(a critic who wrote =/would have en:o#ed the pla# e6cept that / had an unfortunate seat. /t faced the stage.=

3he resuscitation of D !irwa#s borders on the (iraculous. 3hose who havewatched (# (oves in this invest(ent know that / have co(piled a record that isunble(ished b# success. / was wrong in originall# purchasing the stock, and / waswrong later, in repeatedl# tr#ing to unload our holdings at +0 cents on the dollar.

3wo changes at the co(pan# coincided with its re(arkable rebound 1) harlieand / left the board of directors and *) tephen olf beca(e >O. ?ortunatel# forour egos, the second event was the ke# tephen olfs acco(plish(ents at theairline have been pheno(enal.

3here still is (uch to do at D !irwa#s, but survival is no longer an issue.onseuentl#, the co(pan# (ade up the dividend arrearages on our preferred during1997, adding e6tra pa#(ents to co(pensate us for the dela# we suffered. 3heco(pan#s co((on stock, further(ore, has risen fro( a low of $% to a recent high of$7.

Our preferred has been called for rede(ption on ;arch 1+. "ut the rise in theco(pan#s stock has given our conversion rights, which we thought worthless notlong ago, great value. /t is now al(ost certain that our D !irwa#s shares will

produce a decent profit -- that is, if (# cost for ;aalo6 is e6cluded -- and the gaincould even prove indecent.

Fe6t ti(e / (ake a big, du(b decision, "erkshire shareholders will know what todo1hone 2r! Wolf.



21/25

/n addition to the convertible preferreds, we purchased one other privateplace(ent in 1991, $00 (illion of !(erican >6press 5ercs. 3his securit# wasessentiall# a co((on stock that featured a tradeoff in its first three #ears ereceived e6tra dividend pa#(ents during that period, but we were also capped in the

price appreciation we could realiAe. Cespite the cap, this holding has proved

e6traordinaril# profitable thanks to a (ove b# #our hair(an that co(bined luck andskill -- 110& luck, the balance skill.

Our 5ercs were due to convert into co((on stock in !ugust 199%, and in the(onth before / was (ulling whether to sell upon conversion. One reason to hold was!(e6s outstanding >O, Barve# olub, who see(ed likel# to (a6i(iAe whatever

potential the co(pan# had 'a supposition that has since been proved -- in spades). "utthe siAe of that potential was in uestion !(e6 faced relentless co(petition fro( a(ultitude of card-issuers, led b# O of BertA. ?rank is a brilliant (anager, withinti(ate knowledge of the card business. o fro( the first tee on / was uiAAing hi(about the industr#. "# the ti(e we reached the second green, ?rank had convinced (ethat !(e6s corporate card was a terrific franchise, and / had decided not to sell. Onthe back nine / turned bu#er, and in a few (onths "erkshire owned 10& of theco(pan#.

e now have a $ billion gain in our !(e6 shares, and / naturall# feel ver#grateful to ?rank. "ut eorge illespie, our (utual friend, sa#s that / a( confusedabout where (# gratitude should go. !fter all, he points out, it was he who arrangedthe ga(e and assigned (e to ?ranks fourso(e.


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e are reuired to file our uarterl# infor(ation with the > no later than %+da#s after the end of each uarter. One of our goals in posting co((unications on the/nternet is to (ake this (aterial infor(ation -- in full detail and in a for( unfiltered

b# the (edia -- si(ultaneousl# available to all interested parties at a ti(e when(arkets are closed. !ccordingl#, we plan to send our 1998 uarterl# infor(ation to

the > on three ?rida#s, ;a# 1+, !ugust 1%, and Fove(ber 1, and on those nightsto post the sa(e infor(ation on the /nternet. 3his procedure will put all of ourshareholders, whether the# be direct or =street-na(e,= on an eual footing. i(ilarl#,we will post our 1998 annual report on the /nternet on aturda#, ;arch 1, 1999, and(ail it at about the sa(e ti(e.

Shareholer/=esinate Contri)*tions

!bout 97.7& of all eligible shares participated in "erkshires 1997 shareholder-

designated contributions progra(. ontributions (ade were $1+.% (illion, and ,80charities were recipients. ! full description of the progra( appears on pages +* - +.

u(ulativel#, over the 17 #ears of the progra(, "erkshire has (adecontributions of $11.1 (illion pursuant to the instructions of our shareholders. 3herest of "erkshires giving is done b# our subsidiaries, which stick to the philanthropic

patterns that prevailed before the# were acuired 'e6cept that their for(er ownersthe(selves take on the responsibilit# for their personal charities). /n aggregate, oursubsidiaries (ade contributions of $8.1 (illion in 1997, including in-kind donationsof $%.% (illion.

>ver# #ear a few shareholders (iss out on our contributions progra( becausethe# dont have their shares registered in their own na(es on the prescribed recorddate or because the# fail to get the designation for( back to us within the @0-da#

period allowed. harlie and / regret this. "ut if replies are received late, we have tore:ect the( because we cant (ake e6ceptions for so(e shareholders while refusing to(ake the( for others.

To participate in future programs, you must own 3lass A shares that are

registered in the name of the actual owner, not the nominee name of a broker, bank

or depository! Shares not so registered on August ($, $))4, will be ineligible for the

$))4 program! When you get the contributions form from us, return it promptly sothat it does not get put aside or forgotten!

The Ann*al +eetin

oodstock eekend at "erkshire will be ;a# *-% this #ear. 3he finale will bethe annual (eeting, which will begin at 90 a.(. on ;onda#, ;a# %. ast #ear we(et at !ksarben oliseu(, and both our staff and the crowd were delighted with thevenue. 3here was onl# one crisis 3he night before the (eeting, / lost (# voice,thereb# fulfilling harlies wildest fantas#. Be was crushed when / showed up the

ne6t (orning with (# speech restored.


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ast #ear about 7,+00 attended the (eeting. 3he# represented all +0 states, aswell as 1@ countries, including !ustralia, "raAil, /srael, audi !rabia, ingapore andreece. 3aking into account several overflow roo(s, we believe that we can handle(ore than 11,000 people, and that should put us in good shape this #ear even thoughour shareholder count has risen significantl#. 5arking is a(ple at !ksarbenE acoustics

are e6cellentE and seats are co(fortable.

3he doors will open at 7 a.(. on ;onda# and at 80 we will again feature theworld pre(iere of a (ovie epic produced b# ;arc Ba(burg, our ?O. 3he (eetingwill last until 0, with a short break at noon. 3his interval will per(it the e6haustedto leave unnoticed and allow ti(e for the hardcore to lunch at !ksarbens concessionstands. harlie and / en:o# uestions fro( owners, so bring up whatever is on #our(ind.

"erkshire products will again befor salein the halls outside the (eeting roo(.ast #ear -- not that / pa# attention to this sort of thing -- we again set sales records,

(oving *,+00 pounds of ees cand#, 1,+0 pairs of Ce6ter shoes, $7+,000 of orld"ooks and related publications, and 888 sets of uikut knives. e also took ordersfor a new line of apparel, featuring our "erkshire logo, and sold about 1,000 polo,sweat, and 3-shirts. !t this #ears (eeting, we will unveil our 1998 collection.

>/O will again be on hand with a booth staffed b# star associates fro( itsregional offices. ?ind out whether #ou can save (one# b# shifting #our autoinsurance to >/O. !bout %0& of those who check us out learn that savings are

possible. 3he proportion is not 100& because insurers differ in their underwriting:udg(ents, with so(e favoring drivers who live in certain geographical areas andwork at certain occupations (ore than we do. e believe, however, that we (orefreuentl# offer the low price than does an# other national carrier selling insurance toall co(ers. /n the >/O infor(ational (aterial that acco(panies this report, #ouwill see that in 8 states we now offer a special discount of as (uch as 8& to ourshareholders. e also have applications pending that would e6tend this discount todrivers in other states.

!n attach(ent to the pro6# (aterial that is enclosed with this report e6plains how#ou can obtain the card #ou will need for ad(ission to the (eeting. e e6pect a largecrowd, so get plane, hotel and car reservations pro(ptl#. !(erican >6press '800-799-@@%) will be happ# to help #ou with arrange(ents. !s usual, we will have buses at

the larger hotels that will take #ou to and fro( the (eeting and also deliver #ou toFebraska ?urniture ;art, "orshei(s and the airport after its conclusion. Kou arelikel#, however, to find a car hand#.

F?;s (ain store, located on a 7+-acre site about a (ile fro( !ksarben, is openfro( 10 a.(. to 9 p.(. on weekda#s, 10 a.(. to @ p.(. on aturda#s, and noon to @

p.(. on unda#s. Curing the period fro( ;a# 1 to ;a# +, shareholders who presentF?; with the coupon that will acco(pan# their (eeting ticket will be entitled to adiscount that is otherwise restricted to its e(plo#ees.

"orshei(s nor(all# is closed on unda# but will be open for shareholders fro(

10 a.(. to @ p.(. on ;a# rd. ast #ear was our second-best shareholders da#,e6ceeded onl# b# 199@s. / regard this slippage as an ano(al# and hope that #ou will


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prove (e right this #ear. harlie will be available for autographs. Be s(iles, however,onl# if the paper he signs is a "orshei(s sales ticket. hareholders who wish to visiton aturda# '10 a.(. to +0 p.(.) or on ;onda# '10 a.(.-8 p.(.) should be sure toidentif# the(selves as "erkshire owners so that usan Gacues, "orshei(s >O, can(ake #ou especiall# welco(e. usan, / should add, had a fabulous #ear in 1997. !s a

(anager, she is ever#thing that an owner hopes for.

On unda# afternoon we will also have a special treat for bridge pla#ers in the(all outside of "orshei(s. 3here, "ob Ba((an -- a legend of the ga(e for (orethan three decades -- will take on all co(ers. Goin in and daAAle "ob with #our skill.

;# favorite steakhouse, orats, opens one unda# a #ear -- for "erkshireshareholders on the night before the annual (eeting. ast #ear the restaurant startedserving at % p.(. and finished about 10 a.(, an endurance trial that was the result oftaking 1,100 reservations vs. a seating capacit# of *+. /f #ou (ake a reservation andthen cant attend, be sure to let orats know pro(ptl#, since it goes to great effort to

help us and we want to reciprocate. Kou can (ake reservations beginning on !pril 1st'but not before) b# calling %0*-++1-7. ast #ear / had to leave orats a little earl#

because of (# voice proble(, but this #ear / plan to leisurel# savor ever# bite of (#rare 3-bone and double order of hash browns.

!fter this war(up, harlie and / will head for the Cair# ueen on 11%th, :ustsouth of Codge. 3here are 1* great Cair# ueens in (etropolitan O(aha, but the11%th treet location is the best suited to handle the large crowd that we e6pect. outhof the propert#, there are hundreds of parking spaces on both sides of the street. !lso,this Cair# ueen will e6tend its unda# hours to 11 p.(. in order to acco((odate ourshareholders.

3he 11%th treet operation is now run b# two sisters, oni "irge and CebFovotn#, whose grandfather put up the building in 19@* at what was then the outeredge of the cit#. 3heir (other, Gan Foble, took over in 197*, and oni and Cebcontinue as third generation owner-(anagers. Gan, oni and Ceb will all be on handunda# evening, and / hope that #ou (eet the(. >n:o# one of their ha(burgers if #oucant get into orats. !nd then, around eight oclock, :oin (e in having a Cust#undae for dessert. 3his ite( is a personal specialt# -- the Cair# ueen will furnish#ou a cop# of (# recipe -- and will be offered onl# on hareholder unda#.

3he O(aha Io#als and !lbuuerue Cukes will pla# baseball on aturda#evening, ;a# *nd, at Iosenblatt tadiu(. !s usual, #our hair(an, sha(elessl#e6ploiting his *+& ownership of the tea(, will take the (ound. "ut this #ear #ou willsee so(ething new.

/n past ga(es, (uch to the baffle(ent of the crowd, / have shaken off thecatchers first call. Be has consistentl# asked for (# sweeping curve, and / have :ustas regularl# resisted. /nstead, / have served up a pathetic fast ball, which on (# bestda# was clocked at eight (iles per hour 'with a following wind).

3heres a stor# behind (# unwillingness to throw the curve ball. !s so(e of #ou

(a# know, and# u((ings invented the curve in 18@7 and used it to great effect inthe Fational !ssociation, where he never won less than *8 ga(es in a season. 3he


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pitch, however, drew i((ediate criticis( fro( the ver# highest of authorities, na(el#harles >lliott, then president of Barvard Dniversit#, who declared, =/ have heard thatthis #ear we at Barvard won the baseball cha(pionship because we have a pitcherwho has a fine curve ball. / a( further instructed that the purpose of the curve ball isto deliberatel# deceive the batter. Barvard is not in the business of teaching

deception.= '/( not (aking this up.)

>ver since / learned of 5resident >lliotts (oral teachings on this sub:ect, / havescrupulousl# refrained fro( using (# curve, however devastating its effect (ighthave been on hapless batters. Fow, however, it is ti(e for (# kar(a to run over>lliotts dog(a and for (e to uit holding back.

Warren Buffett Shareholder letter 1997

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Transcript of Warren Buffett Shareholder letter 1997