Berkshire’s Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
in Per-Share
Market Value of
Berkshire
in S&P 500
with Dividends
Included
1965 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.8
49.5
10.0
1966 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.3
(3.4)
(11.7)
1967 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.0
13.3
30.9
1968 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.0
77.8
11.0
1969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.2
19.4
(8.4)
1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.0
(4.6)
3.9
1971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.4
80.5
14.6
1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.7
8.1
18.9
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.7
(2.5)
(14.8)
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.5
(48.7)
(26.4)
1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.9
2.5
37.2
1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59.3
129.3
23.6
1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.9
46.8
(7.4)
1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.0
14.5
6.4
1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.7
102.5
18.2
1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.3
32.8
32.3
1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.4
31.8
(5.0)
1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40.0
38.4
21.4
1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32.3
69.0
22.4
1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.6
(2.7)
6.1
1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48.2
93.7
31.6
1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.1
14.2
18.6
1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.5
4.6
5.1
1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.1
59.3
16.6
1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44.4
84.6
31.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.4
(23.1)
(3.1)
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.6
35.6
30.5
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.3
29.8
7.6
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.3
38.9
10.1
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.9
25.0
1.3
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43.1
57.4
37.6
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.8
6.2
23.0
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.1
34.9
33.4
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48.3
52.2
28.6
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.5
(19.9)
21.0
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.5
26.6
(9.1)
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.2)
6.5
(11.9)
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.0
(3.8)
(22.1)
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.0
15.8
28.7
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.5
4.3
10.9
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4
0.8
4.9
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.4
24.1
15.8
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.0
28.7
5.5
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9.6)
(31.8)
(37.0)
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.8
2.7
26.5
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.0
21.4
15.1
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.6
(4.7)
2.1
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.4
16.8
16.0
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.2
32.7
32.4
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.3
27.0
13.7
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4
(12.5)
1.4
Compounded Annual Gain – 1965-2015 . . . . . . . . . . . . . . . . . . . . . .
19.2%
20.8%
9.7%
Overall Gain – 1964-2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
798,981%
1,598,284%
11,355%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979,
accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was
previously the requirement. In this table, Berkshire’s results through 1978 have been restated to conform to the changed rules. In all other respects,
the results are calculated using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a
corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the
years, the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2015 was $15.4 billion, which increased the per-share book value of
both our Class A and Class B stock by 6.4%. Over the last 51 years (that is, since present management took over),
per-share book value has grown from $19 to $155,501, a rate of 19.2% compounded annually.*
During the first half of those years, Berkshire’s net worth was roughly equal to the number that really
counts: the intrinsic value of the business. The similarity of the two figures existed then because most of our
resources were deployed in marketable securities that were regularly revalued to their quoted prices (less the tax that
would be incurred if they were to be sold). In Wall Street parlance, our balance sheet was then in very large part
“marked to market.”
By the early 1990s, however, our focus had changed to the outright ownership of businesses, a shift that
diminished the relevance of balance-sheet figures. That disconnect occurred because the accounting rules that apply
to controlled companies are materially different from those used in valuing marketable securities. The carrying
value of the “losers” we own is written down, but “winners” are never revalued upwards.
We’ve had experience with both outcomes: I’ve made some dumb purchases, and the amount I paid for the
economic goodwill of those companies was later written off, a move that reduced Berkshire’s book value. We’ve
also had some winners – a few of them very big – but have not written those up by a penny.
Over time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gap
between intrinsic value and book value. Today, the large – and growing – unrecorded gains at our “winners” make it
clear that Berkshire’s intrinsic value far exceeds its book value. That’s why we would be delighted to repurchase
our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully
increase per-share intrinsic value for Berkshire’s continuing shareholders.
The unrecorded increase in the value of our owned businesses explains why Berkshire’s aggregate market-
value gain – tabulated on the facing page – materially exceeds our book-value gain. The two indicators vary
erratically over short periods. Last year, for example, book-value performance was superior. Over time, however,
market-value gains should continue their historical tendency to exceed gains in book value.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of
those shown for A.
3
The Year at Berkshire
Charlie Munger, Berkshire Vice Chairman and my partner, and I expect Berkshire’s normalized earning
power to increase every year. (Actual year-to-year earnings, of course, will sometimes decline because of weakness
in the U.S. economy or, possibly, because of insurance mega-catastrophes.) In some years the normalized gains will
be small; at other times they will be material. Last year was a good one. Here are the highlights:
‹ The most important development at Berkshire during 2015 was not financial, though it led to better
earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to
customers last year. To attain that result, we invested about $5.8 billion during the year in capital
expenditures, a sum far and away the record for any American railroad and nearly three times our annual
depreciation charge. It was money well spent.
BNSF moves about 17% of America’s intercity freight (measured by revenue ton-miles), whether
transported by rail, truck, air, water or pipeline. In that respect, we are a strong number one among the
seven large American railroads (two of which are Canadian-based), carrying 45% more ton-miles of freight
than our closest competitor. Consequently, our maintaining first-class service is not only vital to our
shippers’ welfare but also important to the smooth functioning of the U.S. economy.
For most American railroads, 2015 was a disappointing year. Aggregate ton-miles fell, and earnings
weakened as well. BNSF, however, maintained volume, and pre-tax income rose to a record $6.8 billion*
(a gain of $606 million from 2014). Matt Rose and Carl Ice, the managers of BNSF, have my thanks and
deserve yours.
‹ BNSF is the largest of our “Powerhouse Five,” a group that also includes Berkshire Hathaway Energy,
Marmon, Lubrizol and IMC. Combined, these companies – our five most profitable non-insurance
businesses – earned $13.1 billion in 2015, an increase of $650 million over 2014.
Of the five, only Berkshire Hathaway Energy, then earning $393 million, was owned by us in 2003.
Subsequently, we purchased three of the other four on an all-cash basis. In acquiring BNSF, however, we
paid about 70% of the cost in cash and, for the remainder, issued Berkshire shares that increased the
number outstanding by 6.1%. In other words, the $12.7 billion gain in annual earnings delivered Berkshire
by the five companies over the twelve-year span has been accompanied by only minor dilution. That
satisfies our goal of not simply increasing earnings, but making sure we also increase per-share results.
‹ Next year, I will be discussing the “Powerhouse Six.” The newcomer will be Precision Castparts Corp.
(“PCC”), a business that we purchased a month ago for more than $32 billion of cash. PCC fits perfectly
into the Berkshire model and will substantially increase our normalized per-share earning power.
Under CEO Mark Donegan, PCC has become the world’s premier supplier of aerospace components (most
of them destined to be original equipment, though spares are important to the company as well). Mark’s
accomplishments remind me of the magic regularly performed by Jacob Harpaz at IMC, our remarkable
Israeli manufacturer of cutting tools. The two men transform very ordinary raw materials into extraordinary
products that are used by major manufacturers worldwide. Each is the da Vinci of his craft.
PCC’s products, often delivered under multi-year contracts, are key components in most large aircraft.
Other industries are served as well by the company’s 30,466 employees, who work out of 162 plants in 13
countries. In building his business, Mark has made many acquisitions and will make more. We look
forward to having him deploy Berkshire’s capital.
* Throughout this letter, all earnings are stated on a pre-tax basis unless otherwise designated.
4
A personal thank-you: The PCC acquisition would not have happened without the input and assistance of
our own Todd Combs, who brought the company to my attention a few years ago and went on to educate
me about both the business and Mark. Though Todd and Ted Weschler are primarily investment managers
– they each handle about $9 billion for us – both of them cheerfully and ably add major value to Berkshire
in other ways as well. Hiring these two was one of my best moves.
‹ With the PCC acquisition, Berkshire will own 101⁄4 companies that would populate the Fortune 500 if they
were stand-alone businesses. (Our 27% holding of Kraft Heinz is the 1⁄4.) That leaves just under 98% of
America’s business giants that have yet to call us. Operators are standing by.
‹ Our many dozens of smaller non-insurance businesses earned $5.7 billion last year, up from $5.1 billion in
2014. Within this group, we have one company that last year earned more than $700 million, two that
earned between $400 million and $700 million, seven that earned between $250 million and $400 million,
six that earned between $100 million and $250 million, and eleven that earned between $50 million and
$100 million. We love them all: This collection of businesses will expand both in number and earnings as
the years go by.
‹ When you hear talk about America’s crumbling infrastructure, rest assured that they’re not talking about
Berkshire. We invested $16 billion in property, plant and equipment last year, a full 86% of it deployed in
the United States.
I told you earlier about BNSF’s record capital expenditures in 2015. At the end of every year, our railroad’s
physical facilities will be improved from those existing twelve months earlier.
Berkshire Hathaway Energy (“BHE”) is a similar story. That company has invested $16 billion in
renewables and now owns 7% of the country’s wind generation and 6% of its solar generation. Indeed, the
4,423 megawatts of wind generation owned and operated by our regulated utilities is six times the
generation of the runner-up utility.
We’re not done. Last year, BHE made major commitments to the future development of renewables in
support of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, both
for the environment and for Berkshire’s economics.
‹ Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2015 – that
makes 13 years in a row – and increased its float. During those years, our float – money that doesn’t belong
to us but that we can invest for Berkshire’s benefit – grew from $41 billion to $88 billion. Though neither
that gain nor the size of our float is reflected in Berkshire’s earnings, float generates significant investment
income because of the assets it allows us to hold.
Meanwhile, our underwriting profit totaled $26 billion during the 13-year period, including $1.8 billion
earned in 2015. Without a doubt, Berkshire’s largest unrecorded wealth lies in its insurance business.
We’ve spent 48 years building this multi-faceted operation, and it can’t be replicated.
‹ While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on
acquisitions. Last year we contracted for 29 bolt-ons, scheduled to cost $634 million in aggregate. The cost
of these purchases ranged from $300,000 to $143 million.
Charlie and I encourage bolt-ons, if they are sensibly-priced. (Most deals offered us most definitely aren’t.)
These purchases deploy capital in operations that fit with our existing businesses and that will be managed
by our corps of expert managers. That means no additional work for us, yet more earnings for Berkshire, a
combination we find highly appealing. We will make many dozens of bolt-on deals in future years.
5
‹ Our Heinz partnership with Jorge Paulo Lemann, Alex Behring and Bernardo Hees more than doubled its
size last year by merging with Kraft. Before this transaction, we owned about 53% of Heinz at a cost of
$4.25 billion. Now we own 325.4 million shares of Kraft Heinz (about 27%) that cost us $9.8 billion. The
new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your
Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite
meal. (We will have the Oscar Mayer Wienermobile at the annual meeting – bring your kids.)
Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us
to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our
Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions
below its market value, an outcome only an accountant could love.
Berkshire also owns Kraft Heinz preferred shares that pay us $720 million annually and are carried at $7.7
billion on our balance sheet. That holding will almost certainly be redeemed for $8.32 billion in June (the
earliest date allowed under the preferred’s terms). That will be good news for Kraft Heinz and bad news for
Berkshire.
Jorge Paulo and his associates could not be better partners. We share with them a passion to buy, build and
hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing
this goal.
Their method, at which they have been extraordinarily successful, is to buy companies that offer an
opportunity for eliminating many unnecessary costs and then – very promptly – to make the moves that will
get the job done. Their actions significantly boost productivity, the all-important factor in America’s
economic growth over the past 240 years. Without more output of desired goods and services per working
hour – that’s the measure of productivity gains – an economy inevitably stagnates. At much of corporate
America, truly major gains in productivity are possible, a fact offering opportunities to Jorge Paulo and his
associates.
At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow
an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by
cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in
which these CEOs – and their eventual successors, who typically are like-minded – can maximize both
their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am
heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to
marry someone with the intent of changing their behavior.”)
We will continue to operate with extreme – indeed, almost unheard of – decentralization at Berkshire. But
we will also look for opportunities to partner with Jorge Paulo, either as a financing partner, as was the
case when his group purchased Tim Horton’s, or as a combined equity-and-financing partner, as at Heinz.
We also may occasionally partner with others, as we have successfully done at Berkadia.
Berkshire, however, will join only with partners making friendly acquisitions. To be sure, certain hostile
offers are justified: Some CEOs forget that it is shareholders for whom they should be working, while other
managers are woefully inept. In either case, directors may be blind to the problem or simply reluctant to
make the change required. That’s when new faces are needed. We, though, will leave these “opportunities”
for others. At Berkshire, we go only where we are welcome.
6
‹ Berkshire increased its ownership interest last year in each of its “Big Four” investments – American
Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our
ownership to 8.4% versus 7.8% at yearend 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other
two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our
equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8%
to 15.6%. In case you think these seemingly small changes aren’t important, consider this math: For the
four companies in aggregate, each increase of one percentage point in our ownership raises Berkshire’s
portion of their annual earnings by about $500 million.
These four investees possess excellent businesses and are run by managers who are both talented and
shareholder-oriented. Their returns on tangible equity range from excellent to staggering. At Berkshire, we
much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of
a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.
If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” 2015 earnings
amounted to $4.7 billion. In the earnings we report to you, however, we include only the dividends they
pay us – about $1.8 billion last year. But make no mistake: The nearly $3 billion of these companies’
earnings we don’t report are every bit as valuable to us as the portion Berkshire records.
The earnings our investees retain are often used for repurchases of their own stock – a move that increases
Berkshire’s share of future earnings without requiring us to lay out a dime. The retained earnings of these
companies also fund business opportunities that usually turn out to be advantageous. All that leads us to
expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time. If
gains do indeed materialize, dividends to Berkshire will increase and so, too, will our unrealized capital
gains.
Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled
businesses – gives us a significant edge over companies that limit themselves to acquisitions they will
operate. Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance
of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either
operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s
endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile
of funds that can be tapped when an elephant-sized acquisition is offered to us.
* * * * * * * * * * * *
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course,
only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not
live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a
staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or
their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did
Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is
certain to continue: America’s economic magic remains alive and well.
Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to
see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers
astounding gains.
7
America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net
migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive.
But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita.
(Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.)
In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation.
Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians
need not shed tears for tomorrow’s children.
Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood
regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His
unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few –
transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he
could not, however, live as well as my neighbors now do.
Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided
will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods
and services between those people in their productive years and retirees, between the healthy and the infirm,
between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with
talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills
the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the
battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.
The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they
should – far more goods and services in the future than they have in the past. The quality of their increased bounty
will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more
so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television
set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do,
quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter,
“search” is invaluable to me. (I’m not ready for Tinder, however.)
For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s
golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security
promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their
parents did.
* * * * * * * * * * * *
Considering this favorable tailwind, Berkshire (and, to be sure, a great many other businesses) will almost
certainly prosper. The managers who succeed Charlie and me will build Berkshire’s per-share intrinsic value by
following our simple blueprint of: (1) constantly improving the basic earning power of our many subsidiaries;
(2) further increasing their earnings through bolt-on acquisitions; (3) benefiting from the growth of our investees;
(4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and
(5) making an occasional large acquisition. Management will also try to maximize results for you by rarely, if ever,
issuing Berkshire shares.
8
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number
is for Berkshire shares (nor, in fact, for any other stock). It is possible, however, to make a sensible estimate. In our
2010 annual report we laid out the three elements – one of them qualitative – that we believe are the keys to an
estimation of Berkshire’s intrinsic value. That discussion is reproduced in full on pages 113-114.
Here is an update of the two quantitative factors: In 2015 our per-share cash and investments increased
8.3% to $159,794 (with our Kraft Heinz shares stated at market value), and earnings from our many businesses –
including insurance underwriting income – increased 2.1% to $12,304 per share. We exclude in the second factor
the dividends and interest from the investments we hold because including them would produce a double-counting
of value. In arriving at our earnings figure, we deduct all corporate overhead, interest, depreciation, amortization
and minority interests. Income taxes, though, are not deducted. That is, the earnings are pre-tax.
I used the italics in the paragraph above because we are for the first time including insurance underwriting
income in business earnings. We did not do that when we initially introduced Berkshire’s two quantitative pillars of
valuation because our insurance results were then heavily influenced by catastrophe coverages. If the wind didn’t
blow and the earth didn’t shake, we made large profits. But a mega-catastrophe would produce red ink. In order to
be conservative then in stating our business earnings, we consistently assumed that underwriting would break even
over time and ignored any of its gains or losses in our annual calculation of the second factor of value.
Today, our insurance results are likely to be more stable than was the case a decade or two ago because we
have deemphasized catastrophe coverages and greatly expanded our bread-and-butter lines of business. Last year,
our underwriting income contributed $1,118 per share to the $12,304 per share of earnings referenced in the second
paragraph of this section. Over the past decade, annual underwriting income has averaged $1,434 per share, and we
anticipate being profitable in most years. You should recognize, however, that underwriting in any given year could
well be unprofitable, perhaps substantially so.
Since 1970, our per-share investments have increased at a rate of 18.9% compounded annually, and our
earnings (including the underwriting results in both the initial and terminal year) have grown at a 23.7% clip. It is no
coincidence that the price of Berkshire stock over the ensuing 45 years has increased at a rate very similar to that of
our two measures of value. Charlie and I like to see gains in both sectors, but our main goal is to build operating
earnings.
* * * * * * * * * * * *
Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet and
income characteristics from the others. So we’ll present them as four separate businesses, which is how Charlie and
I view them (though there are important and enduring economic advantages to having them all under one roof). Our
intent is to provide you with the information we would wish to have if our positions were reversed, with you being
the reporting manager and we the absentee shareholders. (Don’t get excited; this is not a switch we are considering.)
Insurance
Let’s look first at insurance. The property-casualty (“P/C”) branch of that industry has been the engine that
has propelled our expansion since 1967, when we acquired National Indemnity and its sister company, National
Fire & Marine, for $8.6 million. Today, National Indemnity is the largest property-casualty company in the world,
as measured by net worth. Moreover, its intrinsic value is far in excess of the value at which it is carried on our
books.
9
One reason we were attracted to the P/C business was its financial characteristics: P/C insurers receive
premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation
accidents, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies
holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this
float for their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds
usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float.
And how we have grown, as the following table shows:
Year
Float (in millions)
1970
$
39
1980
237
1990
1,632
2000
27,871
2010
65,832
2015
87,722
Further gains in float will be tough to achieve. On the plus side, GEICO and several of our specialized
operations are almost certain to grow at a good clip. National Indemnity’s reinsurance division, however, is party to
a number of run-off contracts whose float drifts downward. If we do in time experience a decline in float, it will be
very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that we can
never be subject to immediate or near-term demands for sums that are of significance to our cash resources. This
structure is by design and is a key component in the strength of Berkshire’s economic fortress. It will never be
compromised.
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money
– and, better yet, get paid for holding it.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous
indeed that it sometimes causes the P/C industry as a whole to operate at a significant underwriting loss. This loss,
in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the insurance
industry, despite the float income all its companies enjoy, will continue its dismal record of earning subnormal
returns on tangible net worth as compared to other American businesses. The prolonged period of low interest rates
the world is now dealing with also virtually guarantees that earnings on float will steadily decrease for many years
to come, thereby exacerbating the profit problems of insurers. It’s a good bet that industry results over the next ten
years will fall short of those recorded in the past decade, particularly for those companies that specialize in
reinsurance.
As noted early in this report, Berkshire has now operated at an underwriting profit for 13 consecutive
years, our pre-tax gain for the period having totaled $26.2 billion. That’s no accident: Disciplined risk evaluation is
the daily focus of all of our insurance managers, who know that while float is valuable, its benefits can be drowned
by poor underwriting results. All insurers give that message lip service. At Berkshire it is a religion, Old Testament
style.
So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of
our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of
float as strictly a liability is incorrect. It should instead be viewed as a revolving fund. Daily, we pay old claims and
related expenses – a huge $24.5 billion to more than six million claimants in 2015 – and that reduces float. Just as
surely, we each day write new business that will soon generate its own claims, adding to float.
10
If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this
liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises –
because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the
door tomorrow and not be replaced. The two types of liabilities, however, are treated as equals under GAAP.
A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying our
insurance companies and that increases book value. In very large part, this goodwill represents the price we paid for
the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on
its true value. For example, if an insurance company sustains large and prolonged underwriting losses, any goodwill
asset carried on the books should be deemed valueless, whatever its original cost.
Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our
insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance
operation possessing it – to be far in excess of its historic carrying value. Indeed, almost the entire $15.5 billion we
carry for goodwill in our insurance business was already on our books in 2000. Yet we subsequently tripled our
float. Its value today is one reason – a huge reason – why we believe Berkshire’s intrinsic business value
substantially exceeds its book value.
* * * * * * * * * * * *
Berkshire’s attractive insurance economics exist only because we have some terrific managers running
disciplined operations that possess hard-to-replicate business models. Let me tell you about the major units.
First by float size is the Berkshire Hathaway Reinsurance Group, managed by Ajit Jain. Ajit insures risks
that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and,
most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that
are inappropriate in relation to our resources.
Indeed, Berkshire is far more conservative in avoiding risk than most large insurers. For example, if the
insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything
it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its
many streams of earnings. We would also remain awash in cash and be looking for large opportunities to write
business in an insurance market that might well be in disarray. Meanwhile, other major insurers and reinsurers
would be swimming in red ink, if not facing insolvency.
When Ajit entered Berkshire’s office on a Saturday in 1986, he did not have a day’s experience in the
insurance business. Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our
reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created tens of billions of
value for Berkshire shareholders.
* * * * * * * * * * * *
We have another reinsurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all
exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually
causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both
prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate
premium can’t be obtained.
11
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business
that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,”
spells trouble in any business, but in none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been considerably better than cost-free under his leadership, and we expect that, on average, to continue.
We are particularly enthusiastic about General Re’s international life reinsurance business, which has grown
consistently and profitably since we acquired the company in 1998.
It can be remembered that soon after we purchased General Re, it was beset by problems that caused
commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone. General Re
is now a gem.
* * * * * * * * * * * *
Finally, there is GEICO, the insurer on which I cut my teeth 65 years ago. GEICO is managed by Tony
Nicely, who joined the company at 18 and completed 54 years of service in 2015. Tony became CEO in 1993, and
since then the company has been flying. There is no better manager than Tony. In the 40 years that I’ve known him,
his every action has made great sense.
When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the
company enjoyed compared to the expenses borne by the giants of the industry. It was clear to me that GEICO
would succeed because it deserved to succeed.
No one likes to buy auto insurance. Almost everyone, though, likes to drive. The insurance consequently
needed is a major expenditure for most families. Savings matter to them – and only a low-cost operation can deliver
these. Indeed, at least 40% of the people reading this letter can save money by insuring with GEICO. So stop
reading – right now! – and go to geico.com or call 800-368-2734.
GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after
year. (We ended 2015 with 11.4% of the market compared to 2.5% in 1995, when Berkshire acquired control of
GEICO.) The company’s low costs create a moat – an enduring one – that competitors are unable to cross.
All the while, our gecko never tires of telling Americans how GEICO can save them important money. I
love hearing the little guy deliver his message: “15 minutes could save you 15% or more on car insurance.” (Of
course, there’s always a grouch in the crowd. One of my friends says he is glad that only a few animals can talk,
since the ones that do speak seem unable to discuss any subject but insurance.)
* * * * * * * * * * * *
In addition to our three major insurance operations, we own a group of smaller companies that primarily
write commercial coverages. In aggregate, these companies are a large, growing and valuable operation that
consistently delivers an underwriting profit, usually much better than that reported by their competitors. Indeed,
over the past 13 years, this group has earned $4 billion from underwriting – about 13% of its premium volume –
while increasing its float from $943 million to $9.9 billion.
Less than three years ago, we formed Berkshire Hathaway Specialty Insurance (“BHSI”), which we include
in this group. Our first decision was to put Peter Eastwood in charge. That move was a home run: BHSI has already
developed $1 billion of annual premium volume and, under Peter’s direction, is destined to become one of the
world’s leading P/C insurers.
12
Here’s a recap of underwriting earnings and float by division:
Underwriting Profit
Yearend Float
(in millions)
Insurance Operations
2015
2014
2015
2014
BH Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
421
$
606
$ 44,108
$ 42,454
General Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132
277
18,560
19,280
GEICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
460
1,159
15,148
13,569
Other Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
824
626
9,906
8,618
$ 1,837
$ 2,668
$ 87,722
$ 83,921
Berkshire’s great managers, premier financial strength and a variety of business models protected by wide
moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for
Berkshire shareholders that will only get more valuable with time.
Regulated, Capital-Intensive Businesses
We have two major operations, BNSF and BHE, that share important characteristics distinguishing them
from our other businesses. Consequently, we assign them their own section in this letter and split out their combined
financial statistics in our GAAP balance sheet and income statement. Together, they last year accounted for 37% of
Berkshire’s after-tax operating earnings.
A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with
these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact
not needed because each company has earning power that even under terrible economic conditions would far exceed
its interest requirements. Last year, for example, in a disappointing year for railroads, BNSF’s interest coverage was
more than 8:1. (Our definition of coverage is the ratio of earnings before interest and taxes to interest, not EBITDA/
interest, a commonly used measure we view as seriously flawed.)
At BHE, meanwhile, two factors ensure the company’s ability to service its debt under all circumstances.
The first is common to all utilities: recession-resistant earnings, which result from these companies offering an
essential service on an exclusive basis. The second is enjoyed by few other utilities: a great and ever-widening
diversity of earnings streams, which shield BHE from being seriously harmed by any single regulatory body. These
many sources of profit, supplemented by the inherent advantage of being owned by a strong parent, have allowed
BHE and its utility subsidiaries to significantly lower their cost of debt. This economic fact benefits both us and our
customers.
All told, BHE and BNSF invested $11.6 billion in plant and equipment last year, a massive commitment to
key components of America’s infrastructure. We relish making such investments as long as they promise reasonable
returns – and, on that front, we put a large amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that society will forever need
huge investments in both transportation and energy. It is in the self-interest of governments to treat capital providers
in a manner that will ensure the continued flow of funds to essential projects. It is concomitantly in our self-interest
to conduct our operations in a way that earns the approval of our regulators and the people they represent.
Low prices are a powerful way to keep these constituencies happy. In Iowa, BHE’s average retail rate is
6.8¢ per KWH. Alliant, the other major electric utility in the state, averages 9.5¢. Here are the comparable industry
figures for adjacent states: Nebraska 9.0¢, Missouri 9.3¢, Illinois 9.3¢, Minnesota 9.7¢. The national average is
10.4¢. Our rock-bottom prices add up to real money for paycheck-strapped customers.
13
At BNSF, price comparisons between major railroads are far more difficult to make because of significant
differences in both their mix of cargo and the average distance it is carried. To supply a very crude measure,
however, our revenue per ton-mile was just under 3¢ last year, while shipping costs for customers of the other four
major U.S.-based railroads were at least 40% higher, ranging from 4.2¢ to 5.3¢.
Both BHE and BNSF have been leaders in pursuing planet-friendly technology. In wind generation, no
state comes close to Iowa, where last year megawatt-hours we generated from wind equaled 47% of all
megawatt-hours sold to our retail customers. (Additional wind projects to which we are committed will take that
figure to 58% in 2017.)
BNSF, like other Class I railroads, uses only a single gallon of diesel fuel to move a ton of freight almost
500 miles. That makes the railroads four times as fuel-efficient as trucks! Furthermore, railroads alleviate highway
congestion – and the taxpayer-funded maintenance expenditures that come with heavier traffic – in a major way.
Here are the key figures for BHE and BNSF:
Berkshire Hathaway Energy (89.9% owned)
Earnings (in millions)
2015
2014
2013
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
460
$
527
$
362
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
314
298
230
Nevada utilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
586
549
(58)
PacifiCorp (primarily Oregon and Utah) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,026
1,010
982
Gas pipelines (Northern Natural and Kern River) . . . . . . . . . . . . . . . . . . . . . . . .
401
379
385
Canadian transmission utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
170
16
—
Renewable projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
175
194
50
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
191
139
139
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
26
12
Operating earnings before corporate interest and taxes . . . . . . . . . . . . . . . . . . . .
3,350
3,138
2,102
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
499
427
296
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
481
616
170
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,370
$ 2,095
$ 1,636
Earnings applicable to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,132
$ 1,882
$ 1,470
BNSF
Earnings (in millions)
2015
2014
2013
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 21,967
$ 23,239
$ 22,014
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,264
16,237
15,357
Operating earnings before interest and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,703
7,002
6,657
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
928
833
729
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,527
2,300
2,135
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,248
$ 3,869
$ 3,793
I currently expect increased after-tax earnings at BHE in 2016, but lower earnings at BNSF.
14
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet
and earnings statement for the entire group.
Balance Sheet 12/31/15 (in millions)
Assets
Liabilities and Equity
Cash and equivalents . . . . . . . . . . . . . . . . . .
$ 6,807
Notes payable . . . . . . . . . . . . . . . . . . . . . .
$ 2,135
Accounts and notes receivable . . . . . . . . . . .
8,886
Other current liabilities . . . . . . . . . . . . . . .
10,565
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,916
Total current liabilities . . . . . . . . . . . . . . .
12,700
Other current assets . . . . . . . . . . . . . . . . . . .
970
Total current assets . . . . . . . . . . . . . . . . . . . .
28,579
Deferred taxes . . . . . . . . . . . . . . . . . . . . . .
3,649
Goodwill and other intangibles . . . . . . . . . .
30,289
Term debt and other liabilities . . . . . . . . .
4,767
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . .
15,161
Non-controlling interests . . . . . . . . . . . . .
521
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
4,445
Berkshire equity . . . . . . . . . . . . . . . . . . . .
56,837
$ 78,474
$ 78,474
Earnings Statement (in millions)
2015
2014
2013*
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107,825
$ 97,689
$ 93,472
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,607
90,788
87,208
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103
109
104
Pre-tax earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,115
6,792
6,160
Income taxes and non-controlling interests . . . . . . . . . . . . . . . . . . . .
2,432
2,324
2,283
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,683
$ 4,468
$ 3,877
* Earnings for 2013 have been restated to exclude Marmon’s leasing operations, which are now included in the
Finance and Financial Products results.
Our income and expense data conforming to GAAP is on page 38. In contrast, the operating expense
figures above are non-GAAP because they exclude some purchase-accounting items (primarily the amortization of
certain intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers
more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do
GAAP figures.
I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand
the disparate nature of intangible assets. Some truly deplete in value over time, while others in no way lose value.
For software, as a big example, amortization charges are very real expenses. Conversely, the concept of recording
charges against other intangibles, such as customer relationships, arises from purchase-accounting rules and clearly
does not reflect economic reality. GAAP accounting draws no distinction between the two types of charges. Both,
that is, are recorded as expenses when earnings are calculated – even though, from an investor’s viewpoint, they
could not differ more.
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In the GAAP-compliant figures we show on page 38, amortization charges of $1.1 billion have been
deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once non-
existent at Berkshire, have become significant because of the many acquisitions we have made. Non-real
amortization charges are likely to climb further as we acquire more companies.
The table on page 55 gives you the current status of our intangible assets as calculated by GAAP. We now
have $6.8 billion left of amortizable intangibles, of which $4.1 billion will be expensed over the next five years.
Eventually, of course, every dollar of these “assets” will be charged off. When that happens, reported earnings
increase even if true earnings are flat. (My gift to my successor.)
I suggest that you ignore a portion of GAAP amortization costs. But it is with some trepidation that I do
that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are
all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.”
If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of
earnings, where in the world do they belong?
Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring
“earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they
fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is
playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of
propagating misleading numbers that can deceive investors.
Depreciation charges are a more complicated subject but are almost always true costs. Certainly they are at
Berkshire. I wish we could keep our businesses competitive while spending less than our depreciation charge, but in
51 years I’ve yet to figure out how to do so. Indeed, the depreciation charge we record in our railroad business falls
far short of the capital outlays needed to merely keep the railroad running properly, a mismatch that leads to GAAP
earnings that are higher than true economic earnings. (This overstatement of earnings exists at all railroads.) When
CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses
lengthen while they speak.
Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however,
you should remember to add back most of the amortization charges we report. You should also subtract something
to reflect BNSF’s inadequate depreciation charge.
* * * * * * * * * * * *
Let’s get back to our many manufacturing, service and retailing operations, which sell products ranging
from lollipops to jet airplanes. Some of this sector’s businesses, measured by earnings on unleveraged net tangible
assets, enjoy terrific economics, producing profits that run from 25% after-tax to far more than 100%. Others
generate good returns in the area of 12% to 20%.
A few, however – these are serious mistakes I made in my job of capital allocation – have very poor
returns. In most of these cases, I was wrong in my evaluation of the economic dynamics of the company or the
industry in which it operates, and we are now paying the price for my misjudgments. At other times, I stumbled in
evaluating either the fidelity or the ability of incumbent managers or ones I later appointed. I will commit more
errors; you can count on that. If we luck out, they will occur at our smaller operations.
Viewed as a single entity, the companies in this group are an excellent business. They employed an average
of $25.6 billion of net tangible assets during 2015 and, despite their holding large quantities of excess cash and
using only token amounts of leverage, earned 18.4% after-tax on that capital.
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Of course, a business with terrific economics can be a bad investment if it is bought at too high a price. We
have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large
figure we show for goodwill and other intangibles. Overall, however, we are getting a decent return on the capital
we have deployed in this sector. Earnings from the group should grow substantially in 2016 as Duracell and
Precision Castparts enter the fold.
* * * * * * * * * * * *
We have far too many companies in this group to comment on them individually. Moreover, their
competitors – both current and potential – read this report. In a few of our businesses we might be disadvantaged if
others knew our numbers. In some of our operations that are not of a size material to an evaluation of Berkshire,
therefore, we only disclose what is required. You can nevertheless find a good bit of detail about many of our
operations on pages 88-91.
Finance and Financial Products
Our three leasing and rental operations are conducted by CORT (furniture), XTRA (semi-trailers), and
Marmon (primarily tank cars but also freight cars, intermodal tank containers and cranes). These companies are
industry leaders and have substantially increased their earnings as the American economy has gained strength. At
each of the three, we have invested more money in new equipment than have many of our competitors, and that’s
paid off. Dealing from strength is one of Berkshire’s enduring advantages.
Kevin Clayton has again delivered an industry-leading performance at Clayton Homes, the second-largest
home builder in America. Last year, the company sold 34,397 homes, about 45% of the manufactured homes bought
by Americans. In contrast, the company was number three in the field, with a 14% share, when Berkshire purchased
it in 2003.
Manufactured homes allow the American dream of home ownership to be achieved by lower-income
citizens: Around 70% of new homes costing $150,000 or less come from our industry. About 46% of Clayton’s
homes are sold through the 331 stores we ourselves own and operate. Most of Clayton’s remaining sales are made to
1,395 independent retailers.
Key to Clayton’s operation is its $12.8 billion mortgage portfolio. We originate about 35% of all
mortgages on manufactured homes. About 37% of our mortgage portfolio emanates from our retail operation, with
the balance primarily originated by independent retailers, some of which sell our homes while others market only
the homes of our competitors.
Lenders other than Clayton have come and gone. With Berkshire’s backing, however, Clayton steadfastly
financed home buyers throughout the panic days of 2008-2009. Indeed, during that period, Clayton used precious
capital to finance dealers who did not sell our homes. The funds we supplied to Goldman Sachs and General Electric
at that time produced headlines; the funds Berkshire quietly delivered to Clayton both made home ownership
possible for thousands of families and kept many non-Clayton dealers alive.
Our retail outlets, employing simple language and large type, consistently inform home buyers of
alternative sources for financing – most of it coming from local banks – and always secure acknowledgments from
customers that this information has been received and read. (The form we use is reproduced in its actual size on
page 119.)
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Mortgage-origination practices are of great importance to both the borrower and to society. There is no
question that reckless practices in home lending played a major role in bringing on the financial panic of 2008,
which in turn led to the Great Recession. In the years preceding the meltdown, a destructive and often corrupt
pattern of mortgage creation flourished whereby (1) an originator in, say, California would make loans and
(2) promptly sell them to an investment or commercial bank in, say, New York, which would package many
mortgages to serve as collateral for a dizzyingly complicated array of mortgage-backed securities to be (3) sold to
unwitting institutions around the world.
As if these sins weren’t sufficient to create an unholy mess, imaginative investment bankers sometimes
concocted a second layer of sliced-up financing whose value depended on the junkier portions of primary offerings.
(When Wall Street gets “innovative,” watch out!) While that was going on, I described this “doubling-up” practice
as requiring an investor to read tens of thousands of pages of mind-numbing prose to evaluate a single security
being offered.
Both the originator and the packager of these financings had no skin in the game and were driven b