is divided into two parts: the first part writes the main text in the article, and the second part adds its own analysis of the market
text ( Buffett letter to shareholders) and writes:
to Berkshire Hathaway all shareholders
In 1984, Berkshire's net value increased by about 150 million US dollars, which was about 133 US dollars per share. This figure seems pretty good, but if the funds invested are considered, it can only be considered ordinary. Over the past 20 years, our net value has increased by about 22.1% annual compound growth rate (from 19.46 in 1965 to 1,108.77 in 1984), and last year it was only 13.6%. As we mentioned last year, what really matters is the growth rate of inclusion value per share, but because it involves too many subjective opinions and is difficult to calculate, in our case, book value is usually replaced (although usually a bit undervalued), and I personally think that in 1984, the degree to which book value increased was comparable.
In the past, I have mentioned from an academic perspective that the surge in capital will drag down the return on capital. Unfortunately, this year we report to you by reporting news. In the past, the growth rate of 22% has become history. In the next ten years, we will earn about US$3.9 billion to grow at 15% every year (assuming we still maintain the current dividend policy , I will discuss it in detail later). To achieve the goal smoothly, we must have some great ideas. My managing partner Charlie Munger does not have any great ideas at the moment, but our experience is that sometimes it will pop up.
The following table shows the source of Berkshire's account surplus. Due to the merger with blue chip printing in the middle of the year, we have changed our equity in some long-term investments.
and the capital gains losses of each company are not included, but are summarized at the end of the table below. "The securities sales gains have been achieved" One column (we believe that the profits of securities sold in a single year are not very meaningful, but the accumulated cumulative figures are very important every year), as for goodwill amortization, they are listed separately in a single field. Although the method listed in this table is different from the general accepted accounting principles, the final profit and loss figure is the same:
Source: Public information sorting
More careful shareholders may find that the amount of guaike insurance special dividend changes with its classification position. Although the profit and loss figures are slightly affected, there is no big difference in essence, but the story behind it is quite interesting.
As I reported last year, (1) In mid-1983, Gaike announced the implementation of treasury stocks to buy back its own shares (2) At the same time, we signed an agreement to agree that Gaike would buy back equal proportions of shares from us (3) In the end, we sold 350,000 shares to Gaike and received 21 million cash, while our shareholding ratio in Gaike remained unchanged (4) Our famous law firm recognized this whole transaction as a capital reduction (5) According to the tax law, we only need to pay 6.9% of the group's inter-enterprise dividend tax (6) The most important thing is that this 21 million cash is much less than the undistributed surplus we did not recognize, so in terms of economic substantiveness, we regard it as a dividend distribution.
However, since this situation is not common and the amount is not small, we specially listed it in last year's quarterly and annual reports, and it has been approved and approved by our local visa accountant.
And the same happened in General Food in 1984, except that the latter was bought directly from the open market, so we sold a little shares every day to keep our shareholding ratio in the company unchanged, the same two parties had signed a good agreement before the transaction, and we received much less cash than the unallocated surplus we did not identify in the company, totaling 21 million cash, while the shareholding ratio remained unchanged at 8.75%.
But at this time, the visa accountant's New York headquarters jumped out and spoke, rejecting the conclusion of its branch, and determined that our transaction between Casino and General Foods was an equity sale rather than a dividend distribution. In this case, the cash we received was considered as the income from the stock sale, and after deducting the original original investment cost, it should be listed as capital gains. Of course, this is just an accounting treatment and has nothing to do with tax.
Although we do not agree with New York's view, in order to avoid the accountant's reservation, we reluctantly accept and re-compile the 1983 statement. Despite this, the company was not affected in essence, and our interests in these two companies, cash in accounts, income tax and market value of our holdings remain unchanged.
This year we signed a similar agreement with General Food. In order to ensure that the tax law is recognized as dividend distribution, we will still maintain the proportion of equity held in the company. Of course, if there are similar situations in the future, we will definitely report to all shareholders. After participating in so many similar transactions, we feel that this approach is also beneficial to shareholders who do not sell their shares. When a company with good operating performance and sound financial foundation finds that its stock price is far lower than its intrinsic value, buying back its own stock is the best way to protect shareholders' rights.
But I must explain that I refer to those buying back based on the perspective of principal-earning ratio, which does not include the immoral blackmail of green tickets. In this type of transaction, Party A and Party B exploit Party C who are unaware of it for their own personal interests. Party A means that professional shareholders will issue money or death blackmail to the company's operating class just after buying the stock, while Party B means that the company's operating class is willing to buy back at a high price. As long as the money is not paid by him, Party C is sacrificed like this, and others pay the bill. As a result, the company's operating class still vows to maintain the interests of the company, while the unaware shareholders can only be slaughtered without knowing it.
Last year, several of our invested companies with large investments tried hard to buy their own shares when the price and value difference is quite different. For us as shareholders, there are two benefits:
The first point is very obvious, which is a simple mathematical problem. By buying back the company's stock, it means that you can get two yuan in value at the cost of just one yuan, so the intrinsic value of each share can be greatly improved, which is much better than spending a lot of money to acquire other companies.
The second point is less obvious, and no one knows it, and it is actually difficult to measure it, but the effect becomes more obvious over time. That is, the management authorities can buy back their own stocks to declare their attitude of paying attention to shareholders' rights and interests, rather than just expanding their personal business territory, because the latter is often not only not helpful to shareholders, but even harming the interests of shareholders. In this way, the original shareholders and interested investors will be more confident in the company's prospects, and the stock price will react upward and be closer to its own value.
Relatively, those who always keep slogans protecting shareholders' rights and interests but ignore the suggestions of buying their own stocks, it is difficult to convince everyone that they are not right or wrong. Over time, they will be abandoned by market investors.
Recently, we have bought back our own stocks in large quantities - Gaike, General Food and the Washington Post (Exxon - our fourth largest holding is also actively buying back the stocks, just because we have only recently established the position, so the impact is not big), and in the Dafali Market, we feel quite at ease about investing in a management class that has a competitive advantage while truly paying attention to shareholders' rights.
The following table shows that at the end of 1984, our main investment (all numbers have been deducted from minority equity in companies such as Wesco)
Source: Public information compilation
In the past decade, it has been difficult to find investment targets that can meet our quality and quantity (the gap between price and value). We try to avoid downgrading, but you know that doing nothing is the most difficult thing (a British politician attributed the greatness of the country's 19th century to the ruler's inaction, but historians can propose it casually, but it is difficult for subsequent rulers to really do it)
In addition to the numbers mentioned earlier, the business philosophy of Wesco will be described in detail in the report written by Charlie Munger.
In addition, the businesses we actually control, such as the operations of Nebraska Furniture Store, Xishi Candy, Buffalo Daily and Insurance Group, will be explained later in the Nebraska Furniture Store
Last year, I introduced Mrs. B and her family's excellent performance, but in fact, I underestimated their management talents and personality traits. Mrs. B is the head of the company and is now 91 years old. Local newspapers once described her as going home to eat and sleep after work, and she is anxious to go back to the store to work before dawn every night. She works from morning to night every day, and works seven days a week. The things she decides in one day may be more than the president of a large company decides in one year (of course, it refers to good decisions).
In May this year, Mrs. B was awarded an honorary doctorate degree from New York University (she was a skip student and had never attended school for one day before she obtained this degree). The awards before she received this honor include the president of Exxon Petroleum, the president of Citibank , the president of IBM and the president of General Motors.
The B family has a mother and a son. From their performance, we can see that Mrs. Louie B’s son and his three children all inherited Mrs. B’s personality. Last year, the turnover of a single store in Nebraska furniture store increased by more than 10 million US dollars, becoming more than 110 million. It is the highest single-store performance in the United States. In fact, its success is not unreasonable. The following numbers show everything.
According to last year's financial report, Levitz, the largest furniture retailer in the country, boasts that it sells much cheaper than all local traditional furniture stores, while the company's gross profit margin is as high as 44.4% (that is, the company's cost is only 55.6 yuan for every 100 yuan spent on goods purchased by consumers). However, the gross profit of the Nebraska furniture store is only half of the former, and it relies on excellent efficiency (including salary, rent and advertising costs, which only account for 16.5% of the turnover). We are not going to criticize Levitz. In fact, the company's operations are also excellent, but the performance of the Nebraska furniture store is really good (remember that all this starts with Mrs. B's 500 yuan in 1937). Relying on the cost advantage of careful calculation and large-scale procurement, the Nebraska furniture store not only contributes shareholder surplus, but also saves customers considerable procurement budgets, which also makes the company's customers more and more widespread.
People often ask me what Mrs. B has business tips, but to put it bluntly, it is not a profound truth. Their whole family (1) maintains enthusiasm and enthusiasm for their careers, which will make Franklin and Horazio Alger Jr. look like dropouts (2) implement and decide what to do down-to-earth and decisively (3) Not tempted by external temptations to the company's competitiveness (4) Be able to maintain a noble personality for everyone.
Our trust in the personality of Mrs. B family can be seen from the following transaction process. The Nebraska furniture store has never asked an accountant to check, and we have never inventoryed or checked accounts receivable or fixed assets. We gave her a check of 55 million, and what she gave us was a verbal promise.
We are honored to be able to do business with Mrs. B
Xi Shi Candy The following table is a review of the performance of the company since it was bought by blue chip prints:
Source: Public information sorting
It can be seen that its performance is not in a state of continuous growth. In fact, the profit situation in the boxed chocolate industry is not necessarily the case. Some brands lose money, but some make a lot of money. As far as we know, only one competitor maintains high profits, and Xi Shi's success is due to excellent products and outstanding business talents-Chuck Huggins.
Although the price increase in our product prices in 1984 was not as good as before. 1.4%, but fortunately, we have made great progress in the cost control issues that have plagued us in the past few years. Except for the fact that we cannot control the cost of raw materials, other expenses have only increased by 2.2% compared with last year.In the past, due to the slight decline in single-store sales (referring to weight, not amount), our overall sales could only expand by increasing the store, which of course led to worsening sales costs. In 1984, single-store sales decreased by 1.1%, but overall sales grew by 0.6% due to the expansion (both have included factors in the 53-week 1983). The sales of Xishi Candy are increasingly affected by seasonal factors. In the first four weeks of Christmas, its performance and profit
accounted for 40% and 75% of the year respectively. In addition, the performance during Easter and Valentine's Day is also particularly good. As for the usual business performance, it is mediocre, but because of this, the management department and employees work very hard in the busy season and need special patience to handle a large number of orders. Even so, the service attitude and product quality are not discounted at all. As for other peers, I don’t care. In fact, some people add preservatives or freeze the finished product in order to reduce costs and increase shelf life. We would rather work harder and refuse this approach.
In addition, our store encountered competition from some new food and snack shops during non-holiday periods. Fortunately, in 1984, we launched six new candy bars to fight back, and their results were quite good and widely accepted by consumers. We are currently developing new products that are expected to be launched in the near future.
Looking ahead to next year, we hope to reduce the increase in costs to a lower rate than the inflation rate. Of course, this ratio must be increased in single-store sales to cooperate. It is estimated that the average selling price will increase by 6-7%, and profits will grow steadily.
Buffalo Evening News
1984 profit exceeded our expectations, and was as effective as Xisse Candy's cost control. It excluded the editorial room. The overall working hours decreased by about 2.8%. Due to the increase in productivity, the overall cost was reduced by about 4.9%. Stan Lipsey and his operating team performed the most in the industry, but we also faced an unfavorable factor. In the middle of the year, we signed a work contract with the union for several years, which caused a sharp increase in wages. Based on the union's union and employees' union's union cooperation attitude when the report lost money from 1977 to 1982, the union and employees were the key factor in defeating Courier-express. Therefore, we believe that this adjustment is reasonable. If we had not reduced the cost in time at that time, the current outcome might be completely opposite. Since this adjustment case was carried out in stages, the 1984 The impact of the year is limited, but it will be fully reflected by this time next year. Although we can work hard to improve productivity as a response, the inevitable unit labor costs will increase significantly next year, and the estimated cost of news printing will also increase. Due to these two adverse factors, gross profit will decline slightly next year.
But there are two other points that are beneficial to the company:
(1) The scope of this newspaper's distribution and circulation is a region with extremely high advertising effectiveness. Compared with general regional newspapers, the benefits for advertisers are extremely limited. A subscriber hundreds of miles away is of no use for local grocery stores. For a newspaper, its expenses mainly depend on the total circulation, while its advertising revenue (about 70 to 80% of the total revenue) depends on the actual effective circulation.
(2) The retail performance of Buffalo newspaper is particularly outstanding. Advertisers can pass information to all potential customers by relying on this newspaper.
Last year I told you the newspaper's excellent reader acceptance (among the top 100 newspapers in the United States, we ranked first on weekdays and third on holidays). The latest data shows that the former still maintains first, while the latter jumps second (but our Buffalo subscribers have decreased, mainly in weekdays). The reason for the high acceptance is that our rich news content (we provide the most news in newspapers of the same size). The ratio in 1984 was 50.9% (a little more than 50.4% last year), which is much higher than the average 35%-40%, and we will continue to maintain a ratio of more than 50%. In addition, although we reduced the working hours of the general department last year, the editorial department's preparation remained unchanged. Although the expenses of the editorial room increased by 9.1%, which is much higher than the total cost by 4.9%.
In the business community, the advantages of a strong newspaper are extremely obvious. Bosses usually believe that only by working hard to launch the best products can they maintain high profits. However, this convincing theory breaks the unconvincing facts. When first-class newspapers maintain high profits, third-rate newspapers make no less money at all. Sometimes even more. As long as your newspaper is strong enough locally, of course, the quality of the product is extremely critical for a newspaper to increase its market share. We believe that the same is true in Buffalo, and the main reason why people like Alfred can lead us is the most.
Once the local market is dominated, the newspaper itself, not the market, will determine whether the newspaper is good or bad, but good or bad will eventually make a fortune. This is not the case in general industries. The business of bad products must be bad. However, even a newspaper with poor content still has the value of a bulletin board to the general public. When other conditions are the same, a bad newspaper certainly cannot be like a first-class newspaper. However, it is still useful to ordinary citizens, and indirectly makes advertisers recognize the value of their existence.
Because the market's requirements for newspaper quality are not high, the management class must demand itself. Our newspapers specifically require that the cost of news must be higher than that of general peers in terms of quantity. We are also confident that Stan Lipsey and Murray Light will continue to strengthen the quality. Charlie and I both believe that newspapers are a special institution in society. We are quite proud and look forward to going forward in the future.
Insurance industry
Source: Public information compilation
The table above fully shows the situation facing the entire property insurance industry. The comprehensive ratio represents the ratio of total insurance costs (losses and expenses incurred) to premium income. When it is lower than one hundred, it means there is underwriting interest, and otherwise there is underwriting loss. In the past few years, I have repeatedly emphasized that the company can only maintain a premium growth rate of more than 10% every year to ensure that this ratio remains unchanged. This is based on the fact that the proportion of expenses to premium income remains unchanged, and claims losses will grow by 10% each year due to order volume, inflation and court judgments, etc. Unfortunately, as I predicted, the total increase of premium income from 1979 to 1984 was about 61% (average annual growth rate of 10%), while the combined ratio was 100.6 as in 1979. In contrast, the average premium increased by 30% and the combined ratio became 117.7. To this day, we still believe that the annual change in premium income is the best indicator of the underwriting profit trend. Currently, it shows that the annual premium growth rate will exceed 10% next year, so assuming that no particularly major disaster will occur next year, we expect the comprehensive ratio to develop in a better direction. However, according to the current estimate of industry losses (and annual growth rate of 10%), premium income must grow by 15% for five consecutive years before the comprehensive ratio can be reduced back to 100, which means that by 1989, the premium must grow by just one-fold. This seems unlikely, so on the contrary, we expect premiums to grow by about 10% each year, and the comprehensive ratio will remain between 108-113 under fierce industry competition.
Our own comprehensive ratio in 1984 was a pitiful 134 (I don't include Structured Settlement here) This is three consecutive years when we have performed worse than our peers. We expect the comprehensive ratio to be better next year and will perform better than our peers. Mike has corrected a lot of the mistakes I made before since taking over the insurance business from me, and our business has been concentrated in some insurance policies that have performed worse than expected in the past few years. This situation will help our peers compete with retreat or even get out, and when the competitive situation breaks, we can increase premiums without fear of losing customers.In the past few years, I have repeatedly told you that one day our strong financial strength will help us gain a competitive advantage in insurance operations. This day will eventually come. We are undoubtedly the best and most financially funded insurance company in the United States (even better than some famous and large companies). It is also important that the company's policy is to continue to maintain this advantage. What the policy buyers exchange money for is just a promise, and this promise must withstand all the tests of adversity rather than good times. At the lowest level, it must withstand the double tests of sluggish stock market and particularly unfavorable underwriting conditions. Our insurance subsidiaries are willing and capable of ensuring that their commitments are fulfilled under any circumstances, which is something that few insurance companies can do.
Our financial strength is a very useful tool for the structured compensation (phase compensation) and loss preparation provision business mentioned last year. The claim applicants for structured compensation and the insurance companies applying for reinsurance must be 100% sure that they can get payments smoothly in the next few decades. Few property insurance companies can meet this requirement (in fact, only a few companies can give us the confidence to reinsurance our own risks), and our business in this area has grown greatly. We have held funds to make up for possible liabilities to grow from 16 million to 30 million. We expect this business to continue to grow and grow faster. For this reason, we specially handled capital increase for Columbia Insurance Company, which carried out this business. Although the competition is quite fierce, the profit is also satisfactory.
As for the news about Guaike Insurance, it is roughly good as usual. The company's insured accounts in its main business increased significantly in 1984, and its investment departments performed as well. Although the underwriting results were not ideal, they were still outstanding compared to the peers. As of the end of last year, we owned 36% of the company's equity. If we make up for the total premium income of 880 million of property insurance, ours will be about 320 million, which is about twice the amount we underwriting.
In the past few years, I have repeatedly reminded you that the stock price of Gaike has increased significantly beyond the performance of its industry. Although the latter is equally outstanding, the book value of Gaike in our company is greater than the growth of the company's own intrinsic value. I also warn you that this situation will not happen again and again year after year, and one day its stock price will perform worse than its industry. This sentence came true in 1984. Last year, Gaike's book value at Berkshire did not change much, but its company's intrinsic value increased significantly. Since Gaike represents Berkshire's 27% net value, when its market value sluggish, it directly affects the performance of Berkshire's net value growth. However, we do not think there is anything wrong with this result. We would rather have Gaike's corporate value increase X If the stock price falls, the company's inclusion value will not be halved and the stock price will rise. Take this example, and even all our investments, we are looking at the performance of the company's essential performance rather than the performance of its stock price. If we have a correct view of the company, the market will eventually give it justice.
All Berkshire shareholders have benefited a lot from Gaike's business team, including Jack Byrne, Bill Snyder and Lou Simpson. In their core business - low-cost automotive and housing insurance, Gaike has a significant and sustainable competitive advantage, which is rare in the general industry. It can be regarded as a rare treasure for investors (Gike itself explains this point. The excellent management team focuses all its focus on core businesses to maintain high profitability). Most of the funds generated by Gaike's core businesses are invested by Lou Simpson. Lou is a rare talent with both emotions and rationality. This personality characteristic makes it outstanding in long-term investment. Even if it bears lower risks, its investment reward is much better than its peers. I express my appreciation and gratitude to the above three outstanding managers.
I think all shareholders who have significant investments in the property insurance industry should pay special attention to a blind spot in the industry's annual surplus report. When he was the issuer of the Washington Post, he said: "News Daily is the first-hand draft of history." Unfortunately, the annual financial report provided by property insurance companies can also be regarded as the first-hand draft of the company's financial and operating conditions.
The main problem lies in cost. The most important cost in the insurance industry is the insurance account settlement, and it is really difficult to estimate how much loss will occur in the income in that year. Sometimes the occurrence and degree of loss will not be clear after decades. Generally speaking, the losses recognized by the property insurance industry in the current year mainly include the following items: (1) losses incurred and paid in the current year (2) estimated losses for cases that have occurred but have not been reported but have not been resolved (3) estimated losses made by cases that have occurred but have not been reported, that is, the insurance industry is not aware of (IBNR-occurred but have not been reported yet) and (4) adjustments made to the previous year for the estimates of (2)(3)
Although the adjustment time above may be long, no matter what, the difference between the previously estimated figures and actual figures in year X must be corrected in the next year, whether X+1 or X+10 years, which inevitably leads to misleading profit and loss figures in the future. For example, suppose one of our insured clients was in 1979 Injured in 1984, the estimated amount of claims was $10,000, so in that year we would raise $10,000 in the account and prepare for $10,000 in the account. If the two parties settled for $100,000 in 1984, we must also recognize $90,000 in 1984. Although we know that the loss was in 1979, and assuming that it was the only case we took in 1979, the company's profit and loss and shareholders' equity would be obviously misleading.
No matter how legitimate the intentions of the administration are, there is inevitably some errors that must be implicated in it because "estimation" needs to be widely used to combine all seemingly correct profit and loss figures on the financial statements of the property insurance industry. In order to reduce such errors, most insurers use various statistical methods to adjust their losses estimates for thousands of insured persons as the basis for summarizing all obligations to be paid. In addition, the special preparations listed are called supplementary preparations. The purpose of the adjustment is to make the probability of overestimating and underestimating the losses as close as possible to fifty percent before the payment amount is truly determined.
At Berkshire, we have added a loss preparation that we think is reasonable, but in recent years they have become inappropriate. It is necessary to let you know the severity of the loss preparation listing error involved, so that you can understand how this listing process is unreasonable, and thus determine whether there are certain systematic deviations in the company's financial statements.
The following table shows the insurance underwriting results we have reported in recent years and provides calculations based on the basis of "if we knew at that time, we thought we should be," and the so-called "we think we think we should be," is because it also contains many estimation adjustments to the losses that have occurred before, but these losses have not been finalized, but the entire estimation process has been more accurate because of the passage of one year.
Source: Public information sorting
In order to let you understand the above table later, let us use 1984 The number of years is explained. The pre-tax insured loss for that year was 45 million (this includes 27 million as the losses incurred in the year, plus the estimated difference of 17 million in the previous year)
From this, you can find that the numbers I reported are very different from the actual numbers, and the differences in recent years have become increasingly unfavorable, which makes me feel very upset because (1) I have always believed that I keep my word (2) If my insurance manager and I discovered the seriousness of the matter early, we would not sit idly by (3) We estimated the loss less, which is equivalent to paying over the tax that the treasury did not need to pay (although it will be corrected sooner or later, but the longer the time is, the more interest we lose).
Because we focus on accident insurance and reinsurance, we have more problems in estimating losses than other property insurance companies (when a building you insured burns down, you can quickly respond to the cost of losses, and if the employer you insured finds that a retired employee was infected with a certain disease decades ago due to work relations, you reacted much slower). Even so, I am still embarrassed by the mistakes I made. In the direct insurance part, we greatly underestimated the court and jury's determination of damages regardless of the facts and past cases, and demanded that we, the so-called deep pocket payment group effect, also underestimated the general public's contagious effect of the injured. In the reinsurance part, since we have underestimated the provisions we should make, the insurance companies seeking reinsurance have made the same mistake. Since our losses are deposited based on the information provided by the other party, the mistakes they make are equivalent to our mistakes.
Recently I heard a story that can be used to illustrate the accounting problems encountered by the insurance industry. A man went abroad for business on business. One day, he received a call from his sister saying that his father died of an accident and was unable to rush back to China to attend the funeral. He told his sister to handle all the funeral matters and promised to be responsible for all the expenses. After that, when he returned to China, he received a bill of several hundred dollars, and he immediately paid it. However, a while later he received a bill of 15 yuan, and he also paid it. However, a month later, he received a bill of 15 yuan again. He finally couldn't help but call his sister to ask what was going on. His sister said lightly on the other end of the phone: "Oh! It's nothing, I forgot to tell you that it's because the suit that dad was wearing was rented."
If you have been engaged in the insurance industry, especially reinsurance business in recent years, this story may make you feel heartbroken. Although we have put all suit rents similar to the aforementioned as much as possible in the current financial statements, the results of the past few years have made us ashamed and are enough to arouse your doubts. In the future annual reports, I will continue to report the differences that appear every year, whether it is favorable or unfavorable.
Of course, in the property insurance industry, not all mistakes in making inappropriate preparations are unintentional mistakes. As the performance of underwriting continues to deteriorate, and the management has great discretion in the provision of loss preparations and even the expression of financial statements, the dark side of human nature is revealed. If some companies really carefully evaluate the possible loss costs, they may no longer be suitable to continue to operate. In this case, some are forced to look at potential compensation that have not been paid in a particularly optimistic direction, while others are engaged in transactions that can temporarily hide the losses. Of course, these behaviors can last for a while, and it is difficult for external independent accountants to effectively regulate and stop such behaviors. When an insurance company's actual liabilities exceed assets, the company itself must usually declare itself dead. Under this system that emphasizes self-integrity, the body itself usually gives itself the opportunity to overturn the case and resurrect.
In most companies, the reason for bankruptcy is that the turnover is not working now, but the situation of insurance companies is not like this. You may still be full of energy when you quit, because the premium is received when the insured is in the beginning, but the claim is paid long after the loss occurs. Therefore, an insurance company may have to use up funds for a long time after the net value is exhausted. In fact, these so-called living dead people usually do their best to take any risk at any price to absorb the policy so that cash continues to flow in. This attitude is like an employee who is gambled with deficits on public funds. He can only continue to embezzle the company's money and then gamble, hoping that the next hand can be lucky enough to make up for the previous deficit. Even if it is not successful, defiling one million is a death penalty, and defiling one million is a death penalty. As long as the matter is exposed, they can still maintain their original positions and benefits.
For Berkshire, the mistakes made by other property insurance companies are not just listening. We are not only suffering from the pain of price cuts by the living dead, but when they really go bankrupt, we also have to be unlucky, because the debt repayment funds established by many state governments are collected according to the operating conditions of the insurance industry. Berkshire may be forced to share these losses in the end, and since it is usually too late to find that the incident will be far more serious than imagined. Companies with weak constitutions but do not go bankrupt may go bankrupt, and in the end they are like snowballs, out of control. Of course, if the management authorities discover it early and prevent those bad companies from ending operations, it can prevent the problem from further expanding.
From October 1983 to June 1984, Berkshire's insurance subsidiary continued to buy large amounts of the first, second and third phases of the Washington Public Power Supply System (WPPSS is the company that issued $2.2 billion in July 1983 to repay the original issuance of $4 and fifth phases for the construction of the fourth and fifth phases power plant plan (now abandoned). Although these two bonds are very different from those of the obligor, commitment matters and collateral, the occurrence of the fourth and fifth phases of the first, second and third phases of the bonds have been cast a shadow on the first, second and third phases, and may have major problems with the subsequent issuance of bonds. In addition, some problems in the first, second and third phases themselves may also destroy the guarantees provided by Bonneville that seemed quite credit-based. Despite these negative factors, But Charlie and I evaluated that the risks we took when we bought and the price we bought (much lower than the current market price), the expected reward was still enough to compensate for the risks we had to bear.
As you know, the standard for buying listed companies for insurance subsidiaries is no different from the standard for us to buy the entire company. However, this corporate evaluation model is not widely used by fund managers, and has even been criticized by academics. Despite this, it is quite useful for those followers (some scholars would say that it may actually be feasible, but it must not work in theory. Simply put, if we can buy the economic benefits of a small number of excellent companies at a reasonable price and accumulate some such investment portfolios, it is also a good thing for us. And we even extend this evaluation model to bond investments like WPPSS, which we are more in WPPSS The end-of-term investment cost of 140 million yuan and the same amount of equity investment, the former can generate an after-tax surplus of 23 million (by paying interest fees), and are all cash. Only a few companies can earn 16.3% of their return on capital per year. Even if there is, their stock price is frighteningly high. In terms of general average merger transactions, a company that can earn 23 million yuan in after-tax surplus (equal to earn 45 million before tax) without financial leverage will cost about US$250 million to US$300 million (sometimes higher). Of course, for companies we know and particularly prefer, they may really be able to make a move, but that is still twice the price of our purchase of WPPSS.
However, in the example of WPPSS, we still believe that there is a potential risk that is not worth a penny within one or two years. At the same time, there may be a risk of not being able to pay interest temporarily. What is more important is that we hold bonds with a face value of US$200 million (about 48% higher than our holding cost).Of course, having a upper limit for profit is also a major disadvantage, but you must understand that most business investments will continue to invest a lot of money. In fact, the so-called upper limit for profit is extremely limited. This is because most companies cannot effectively increase their return on shareholders - even the environment of Qualcomm , which was generally believed to automatically increase the return on the rate of return.
Let us further explain this case of using bonds as investment. If you decide to continue to buy more bonds with 12% annual bond interest income, it is like you invest in some ordinary companies that retain surplus and continue to reinvest. For the former, if you invest in 30-year zero-interest bonds for 10 million today, you will get about 300 million US dollars in 2015. As for the latter, if you invest 10 million US dollars in the same company, the market value of the company can increase to 300 million US dollars in thirty years, and both can earn 32 million US dollars in the last year. In other words, when we invest in bonds, it is like treating it as a special type of corporate investment. It has advantages and disadvantages, but we believe that if you look at bonds from a general investment perspective, you will avoid some headaches. For example, in the 20-year AAA-grade tax-free bonds in 1946, the interest rate was less than 1%. In fact, the investors who bought these bonds were equivalent to investing in a bad company that made less than one percentage point a year. If these investors had a little business acumen, they would definitely shake their heads away with laughter. At that time, some companies with great prospects and could earn 10%, 12% or even 15% after tax each year were trading at book value. At that time, no one would suspect that the company that could trade at book value would not make a return rate of 1%, but investors who were accustomed to buying and selling bonds still tried hard to trade under such a benchmark. In the next twenty years, although the situation was not as exaggerated as before, bond investors continued to sign a two- or thirty-year agreement on completely unreasonable conditions from a business perspective. (I personally think the best investment textbook - the last paragraph of the book "Smart Investor" written by Graham mentioned that the best investment is investment from a business perspective)
We must again emphasize that investing in WPPSS must be quite risky and difficult to measure in detail. However, if Charlie and I have fifty similar investment opportunities in my life, I think our final settlement results should be good, but I think we have encountered more than five identical opportunities a year. Although the accumulated results over the long term will definitely be good, it is difficult to maintain a year of miserable results (that is why all the previous sentences are not Charlie and me or us at the beginning).
Most managers don’t have much motivation to make those - smart but sometimes idiot decisions. Their personal gains and losses are too clear. If a great idea is really successful, the superior may pat his shoulder to encourage him, but if it fails, he may have to roll up and walk (failure according to the old method is a feasible path. For a whole group, lemmings may be infamous, but no single lemmings will be criticized), but it is different at Berkshire. He owns 47% of the equity. Charlie and I are not afraid of being fired. We pay as bosses rather than friends, so we treat Berkshire’s money as our own, which often makes us not follow the old path in investment behavior and management style.
Our unconventional approach is reflected in our concentrated investment in insurance funds (including WPPSS bond investments), which can only be successful if we have particularly strong financial strength like us. For other insurance companies, the same level of concentrated holdings may be completely inappropriate because their financial strength may not be able to withstand any major mistakes, no matter how attractive the investment opportunity based on the probability analysis seems.With our financial strength, we can buy a large number of stocks that we want to buy and invest at a reasonable price (Bill Rose describes the trouble of over-diversification of investment. If you have forty wives and concubines, you will definitely not be able to understand every woman thoroughly). Over the long term, our policy of concentrated holdings will eventually show its advantages, although it will be somewhat dragged down by too large scale, and even if they perform particularly badly in a certain year, at least you can be glad that we invest more funds than you.
We buy bond investment in WPPSS at several different points and prices. If we decide to adjust the relevant parts, we may not know you for a long time after the change is over (when you see this annual report, we may have sold or increased the relevant parts). Since the trading of stocks is a fiercely competitive zero-sum game, even if we join a little competition to either side, it will greatly affect our profits. Therefore, we buy WPPSS bonds as the best example. From October 1983 to June 1984, we tried to buy all the first, second and third phases of bonds, but in the end we only bought three percent of all the external volumes. If we meet a clear-minded investor and know that we want foodies, we follow them. For this reason, we may be buying fewer bonds at higher prices (any follower may cost us $5 million more), and for this reason, we do not disclose our inbound and outbound in the stock market, whether for the media, shareholders, or even for anyone, unless specifically required by the law.
Finally, our final experience with WPPSS bonds is that in most cases, we do not like to buy long-term bonds. In fact, we have rarely bought them in recent years. That is because bonds are as stable as the US dollar. However, we believe that Qualcomm inflation is in front of us, although we cannot predict the real number, and we cannot rule out the possibility of completely out of control. This sounds unlikely. Considering that inflation has declined so far, we believe that the current fiscal policy (especially the budget deficit) is quite dangerous and difficult to improve (so far, politicians from both parties have followed Charlie Brown's advice, and there is no problem that cannot be controlled), but if it cannot be improved, Qualcomm inflation may not happen for the time being (but it cannot be completely removed), and once it takes shape, it may accelerate upward swelling. When inflation remains between 5% and 10%, there is actually not much difference between investing in stocks or bonds, but it is not the same in the era of Qualcomm inflation. In that case, investing in stock portfolios will actually suffer significant losses, but bonds that have been circulated may be even worse. Therefore, we believe that all current bond portfolios that are circulated actually contain great risks, so we are particularly cautious about bond investment. We will only consider it when a bond is obviously favorable to other investment opportunities, and in fact, this situation is very rare.
Generally, companies will report dividend policies to shareholders, but they usually do not explain in detail. Some companies will say that our goal is to issue 40%-50% surplus, and at the same time issue dividends at the rate of increasing consumer price index. That's it. There is no analysis to explain why such policies are beneficial to shareholders. However, the allocation of funds is a very important part of the company and investment management. Therefore, we believe that managers and owners should think carefully about the circumstances under which the surplus is retained or distributed will be the most beneficial to shareholders.
First of all, we need to understand that not all surpluses will produce the same results. In many companies, especially those with capital-intensive (high asset/profit ratio), inflation often makes book surpluses become artificial illusions. This restricted surplus cannot be distributed as real dividends, but must be retained and reinvested to maintain the original economic essence. If it is barely distributed, the company will lose its competitiveness in the following aspects: (1) The ability to maintain the original sales quantity (2) Maintain its long-term competitive advantage (3) Maintain its original financial strength, so no matter how conservative its dividend distribution ratio is, if a company continues to do so, it will be destined to face elimination unless you repeatedly suppress more funds.
is not worthless to the company's bosses, but their discounted value is usually pitifully small. In fact, companies must use them, no matter how poor the economic benefits they can generate, (this situation is reserved no matter how unsatisfactory the prospects are, and then incredibly widely circulated ten years ago by Consolidated Edison, when a punitive normative policy was the main reason for the company's share price trading at a price far below the book value, sometimes even at a book value of 25%, that is, when the surplus of each dollar is retained and reinvested, the market expects that the economic benefits it may generate in the future are only 25 cents. Ironically, despite the repeated occurrence of this phenomenon of gold-to-copper, most of the surplus is still retained and reinvested. At the same time, construction sites in the New York metropolitan area gradually emerged. The slogan of the company reads: "Do we still continue to dig?"
I won't talk about restricted surpluses anymore. Let's turn the topic to a more valuable and unrestricted part. The so-called unrestricted surplus, as the name suggests, can be retained or distributed. We believe that whether the allocation is mainly determined by the management authorities to judge which is more beneficial to the company's shareholders. Of course, this principle is not widely accepted by everyone. For some reasons, the management authorities often prefer to retain the surplus to expand the individual's corporate territory and make the company's finances more prosperous. But we still believe that there is only one reason to retain the surplus, that is, every dollar retained can play a more useful benefit, and it must be proved by past achievements or an analysis of the future, and it is determined that it can produce greater benefits than the general shareholder's own use. Specifically, suppose that a shareholder holds a 10% risk-free permanent bonds. This type of bond has a characteristic, that is, investors have the right to choose to receive 10% of the bond interest every year or will continue to buy the same type of bonds than 10%. Assuming that the long-term risk-free yield rate was 5% in one year, the investor should not be so stupid that he chose to receive cash and would continue to buy the same type of bonds, because the latter can generate higher value. In fact, if he really needs cash, he can sell and cash in the market at a higher price after buying the bonds. In other words, if the investors in the market are smart enough, no one will choose to directly receive the cash bond interest. On the contrary, if the market's yield rate was 15%, the situation would be completely opposite. No one will be so stupid that he wants to invest. For a 10% bond, even if he earns too much spare money, he will first choose to collect cash and then go to the market to buy the same bond at a lower price.
The same principle can also be applied to shareholders' question of whether the company's surplus should be issued. Of course, the analysis at this time may be more difficult and error-prone, because the rate of return that can be earned by reinvestment is not like the example of bonds, which is a black and white number, but may change in different ways. Shareholders must judge the average rate of return in the visible future. Once the number is set, the analysis will be much simpler. If the expected rate of return is high, you can reinvest, otherwise it should be distributed.Many managers of companies use the above standards rationally to treat their subsidiaries, but when they are in charge of the parent company, it is not the same as the ones they are in charge. They rarely think about it from the perspective of shareholders. This kind of manager like schizophrenia requires that subsidiaries A, which can only generate a 5% return rate per year, allocate funds back to the parent company, and then transfer investment to subsidiaries B, which can generate a 15% return rate per year. At this time, he will never forget the motto he learned in business schools before. However, if the parent company itself expects a 5% return rate (the average return rate in the market is 10%), at most he will only follow the average cash dividend rate of the company or peers. When he asks his subsidiaries to submit a report to explain the proportion of retaining surplus, he never thought of making any explanation to the shareholders behind his company.
When judging whether the surplus should be kept in the company, shareholders should not just compare the marginal surplus that can be increased by simply comparing the increased capital, because this relationship will be distorted by the current situation of the core business. In the era of Qualcomm inflation, some core businesses with special competitiveness can use a small amount of funds to create extremely high returns (as we mentioned last year). Unless they experience huge growth in sales, a good company should be defined as companies that can generate a lot of cash. In contrast, if a company invests its original funds in low-paid businesses, then even if it will invest the increased capital in a new business with higher rewards, it looks good on the surface, but in fact it is not very good. It is like in a golf match, although most amateur players have achieved terrible results, the team competition only achieves the best results due to the superb skills of some professional players. Looks outstanding. Many companies that seem to continue to pay good performance actually bet most of their funds on uncompetitive businesses. It’s just that the former covers up the terrible failure of the latter (usually buying mediocre companies at high prices), and the management class repeatedly emphasizes the experience they learned from the previous setback, but at the same time, they immediately look for opportunities for the next failure. In this case, shareholders should pay close attention to their wallets and leave only the necessary funds to expand their high-reward careers. The rest should either be returned to shareholders or used to buy back the treasury stocks (a good way to increase shareholders' equity and avoid company messing around). The discussion above
does not mean that the company's dividends will change with the slight differences in quarterly surplus or investment opportunities. Shareholders of listed companies generally prefer that the company has a consistent and stable dividend policy. Therefore, the issuance of dividends should be able to reflect the company's long-term earnings expectations, because the company's prospects usually do not change often, and the dividend policy should be the same. However, in the long run, the company's operating class should ensure that every dollar of profit left is effective. If it is found that it is wrong to retain the surplus, it also means that the existing operating class is wrong to stay.
Now let's look back at Berkshire's own dividend policy. Past records show that Berkshire's retained surplus can earn a higher rate of return than the market, that is, every retained surplus can create value greater than one dollar. In this case, any action of issuing dividends may not benefit all Berkshire shareholders. In fact, based on our experience in the past when we started our business, it was not a good thing to pay a large amount of cash dividends in the early stages of the company. At that time, Charlie and I controlled three companies - Berkshire, Diversified Retail and Blue Chip Printing Company (now merged into one company). The blue Chip Printing Company only paid a little dividend while the other two did not. On the contrary, we sent out all the money we made at that time. We may not make much money now, and we did not even have any capital. These three companies started their own business with one business (1) Berkshire's textiles (2) Diversified Retail Department Store (3) Blue Chip Printing Stamps Trading, these basic businesses (it should be mentioned in particular that those adjectives that Charlie and I repeatedly decided to finalize) have now (1) survived but couldn't make much money (2) Scale shrinks and suffered a significant loss (3) Only when we first took over 5% turnover.So only by investing money in a better career can we overcome our innate disadvantages (as if we were remediating the absurdity of youth), and it is obvious that polygonization is right.
We will continue to diversify and support the growth of our existing careers. Although we have repeatedly emphasized that the rewards of these efforts are definitely inferior to those of the past, as long as every dollar that is retained can create greater benefits, we will continue to do so. Once the surplus we evaluate cannot meet the above standards, we will definitely return all the excess money to shareholders, and of course we will weigh the past records and future prospects at the same time. Of course, there will be a huge change in a single year. Basically, we will make a judgment based on a five-year period.
Our current plan is to expand the insurance industry with retained surpluses. Most of our competitors' financial situation is worse than us and they are unwilling to expand significantly. However, at this moment, when premium income is growing significantly, compared with 5 billion in 1983, it is expected to grow to 15 billion in 1985. This is a rare opportunity for us to make a fortune. Of course, nothing is 100%.
It’s time for me to publish small advertisements every year. Last year, John Loomis (one of our particularly considerate shareholders) mentioned to us a company that fully meets our standards, and we immediately locked it up. Unfortunately, it was a pity that it failed because of an unsolvable question. The following is the same advertisement as last year:
(1) Huge transactions (the annual after-tax surplus is at least five million US dollars)
(2) Continuous and stable profits (we are not interested in companies with vision or turning points)
(3) High shareholder return rate (and rarely borrows)
(4) Having management class (we cannot provide)
(5) Simple companies (if we involve too much high-tech, we don’t understand)
(6) Reasonable price (we do not want to waste too much time with each other until the price is uncertain) We will not engage in hostile mergers and promise to keep them completely confidential and reply as soon as possible if we are interested (usually no more than five minutes),
We tend to take cash transactions and do not consider issuing shares unless the inclusion value we exchange for is as much as we pay. We welcome possible sellers to inquire with those who have worked with us in the past. For those good companies and good business classes, we can provide a good ownership.
97.2% of the effective equity broke the record this year. The shareholders' designated donation program in 1984, totaling about $3 million donations were allocated to 1,519 charities. The information of the shareholders' meeting contains a message that allows you to express your opinions on the program (such as whether to continue, how much should be donated for each share, etc.) You may be interested to know that in fact, no company has ever decided the whereabouts of the company's donations from the shareholder standpoint before. While trusting capitalism, managers seem to trust capitalists.
We recommend that new shareholders read the relevant information as soon as possible. If you also want to participate, we strongly recommend that you quickly register the shares from the broker in your name.
Berkshire's annual shareholders' meeting is expected to be held in Omaha on May 21, 1985. I hope you can participate at that time. Most of the company's annual shareholders' meetings are wasting time for shareholders and the management class. Sometimes it is because the management class is unwilling to discuss the essence of the company in depth, and sometimes it is because some shareholders only care about themselves and do not really care about the company's affairs. The discussion meetings that should be business operations often turn into a farce (this is a most cost-effective idea. As long as you buy a share, you can let a large group of people sit and listen to you talk big). In the end, it is often bad money to drive out good money, so that shareholders who really care about the company will stay away, leaving a bunch of clowns who love to show off.The annual shareholder meeting of Berkshire is not the same. Although the shareholders attending the meeting have been more than one year, we have rarely encountered stupid questions or self-centered remarks so far. On the contrary, everyone raised some insightful business questions. Because the purpose of the meeting is for this, Charlie and I are happy to answer these questions for everyone no matter how much time it takes (but I am sorry that we cannot answer questions in writing or telephone at other times, because if we answer one by one, it is too inefficient if we answer one by one). The only business question we cannot answer is how much integrity will cost to prove, especially our in and out of the stock market.
Finally, I usually have to spend a little time bragging about how good the management cadres of our company are. Welcome to attend the annual meeting and you will know why. If you come to other counties and cities, you can consider shopping in the Nebraska furniture store. If you decide to buy something, you will find that the money you saved is enough to pay for your trip. I believe you will definitely feel that the trip is worth it.
post-issue matters. On March 18, a week after the report was published, we agreed to buy three million shares of Capital City Broadcasting Corporation at US$172.5 per share. One of the conditions is that Capital City must be able to successfully buy ABC ABC , otherwise the contract will be invalid. In the past few years, we repeatedly expressed our respect for the leadership of Capital City, including Tom Murphy and Dan Burke. The reason is very simple, because they are a temporary choice in terms of ability and personality. I will explain in detail the whole story of this investment case next year's annual report.
Warren. Buffett
Board Chairman
Source: Public Information Compilation
Personal Analysis: Ba Lao said that in the business society, the advantages of a strong newspaper are extremely obvious. Bosses usually believe that only by working hard to launch the best products can you maintain high profits, but this convincing theory breaks the unconvincing facts. When first-class newspapers maintain high profits, the money earned by third-rate newspapers is not inferior at all, sometimes even more, as long as your newspaper is strong enough in the local area. This is essentially a competition between channels and content, which reminds me of Focus Media. Before Focus Media, many people believed that advertising was the winning of content, but Focus Media founders believed that the way to win through channels was more important, so Focus Media started the road to elevator media. In fact, it is really good that Focus Media’s advertising is really not good. It is very magical. One word repeatedly means that as Chairman Jiang Nanchun said, occupying the mind. Focus Media’s elevator advertising is only a few dozen seconds. Its business model has led to it having to occupy the minds of consumers within more than ten seconds. In the long run, I don’t know. Maybe in the fast-paced society, everyone no longer needs content. It’s just that it’s very simple and magical. At least there is no big loophole in the business model of Focus Media at present. Of course, I’m not saying that this company is definitely right.
