Warren Buffett, Berkshire Hathaway — 2010
Berkshire’s Corporate Performance vs. the S&P 500 Annual Percentage Change Year in Per-Share Book Value of Berkshire (1) in S&P 500 with Dividends Included (2) Relative Results (1)-(2) 1965...................................................23.810.013.8 1966...................................................20.3(11.7)32.0 1967...................................................11.030.9(19.9) 1968...................................................19.011.08.0 1969...................................................16.2(8.4)24.6 1970...................................................12.03.98.1 1971...................................................16.414.61.8 1972...................................................21.718.92.8 1973...................................................4.7(14.8)19.5 1974...................................................5.5(26.4)31.9 1975...................................................21.937.2(15.3) 1976...................................................59.323.635.7 1977...................................................31.9(7.4)39.3 1978...................................................24.06.417.6 1979...................................................35.718.217.5 1980...................................................19.332.3(13.0) 1981...................................................31.4(5.0)36.4 1982...................................................40.021.418.6 1983...................................................32.322.49.9 1984...................................................13.66.17.5 1985...................................................48.231.616.6 1986...................................................26.118.67.5 1987...................................................19.55.114.4 1988...................................................20.116.63.5 1989...................................................44.431.712.7 1990...................................................7.4(3.1)10.5 1991...................................................39.630.59.1 1992...................................................20.37.612.7 1993...................................................14.310.14.2 1994...................................................13.91.312.6 1995...................................................43.137.65.5 1996...................................................31.823.08.8 1997...................................................34.133.4.7 1998................................................... 48.328.619.7 1999................................................... .521.0(20.5) 2000................................................... 6.5(9.1)15.6 2001...................................................(6.2)(11.9)5.7 2002...................................................10.0(22.1)32.1 2003...................................................21.028.7(7.7) 2004...................................................10.510.9(.4) 2005...................................................6.44.91.5 2006...................................................18.415.82.6 2007...................................................11.05.55.5 2008...................................................(9.6)(37.0)27.4 2009...................................................19.826.5(6.7) 2010...................................................13.015.1(2.1) Compounded Annual Gain – 1965-2010.......................20.2%9.4%10.8 Overall Gain – 1964-2010..................................490,409%6,262% 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 arepre-taxwhereas the Berkshire numbers areafter-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.: The per-share book value of both our Class A and Class B stock increased by 13% in 2010. Over the last 46 years (that is, since present management took over), book value has grown from $19 to $95,453, a rate of 20.2% compounded annually.* The highlight of 2010 was our acquisition of Burlington Northern Santa Fe, a purchase that’s working out even better than I expected. It now appears that owning this railroad will increase Berkshire’s “normal” earning power by nearly 40% pre-tax and by well over 30% after-tax. Making this purchase increased our share count by 6% and used $22 billion of cash. Since we’ve quickly replenished the cash, the economics of this transaction have turned out very well. A “normal year,” of course, is not something that either Charlie Munger, Vice Chairman of Berkshire and my partner, or I can define with anything like precision. But for the purpose of estimating our current earning power, we are envisioning a year free of a mega-catastrophe in insurance and possessing a general business climate somewhat better than that of 2010 but weaker than that of 2005 or 2006. Using these assumptions, and several others that I will explain in the “Investment” section, I can estimate that the normal earning power of the assets we currently own is about $17 billion pre-tax and $12 billion after-tax, excluding any capital gains or losses. Every day Charlie and I think about how we can build on this base. Both of us are enthusiastic about BNSF’s future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’sthreetimes more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits. Over time, the movement of goods in the United States will increase, and BNSF should get its full share of the gain. The railroad will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required. However slow the economy, or chaotic the markets, our checks will clear. Last year – in the face of widespread pessimism about our economy – we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount, $5.4 billion – or 90% of the total – was spent in the United States. Certainly our businesses will expand abroad in the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new record for capital spending – $8 billion – and spendallof the $2 billion increase in the United States. Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow isalways uncertain.
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor thatiscertain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective. We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead. Performance Charlie and I believe that those entrusted with handling the funds of others should establish performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot the arrow of performance and then paint the bull’s-eye around wherever it lands. In Berkshire’s case, we long ago told you that our job is to increase per-share intrinsic value at a rate greater than the increase (including dividends) of the S&P 500. In some years we succeed; in others we fail. But, if we are unable over time to reach that goal, we have done nothing for our investors, who by themselves could have realized an equal or better result by owning an index fund. The challenge, of course, is the calculation of intrinsic value. Present that task to Charlie and me separately, and you will get two different answers. Precision just isn’t possible. To eliminate subjectivity, we therefore use anunderstatedproxy for intrinsic-value – book value – when measuring our performance. To be sure, some of our businesses are worth far more than their carrying value on our books. (Later in this report, we’ll present a case study.) But since that premium seldom swings wildly from year to year, book value can serve as a reasonable device for tracking how we are doing. The table on page 2 shows our 46-year record against the S&P, a performance quite good in the earlier years and now only satisfactory. The bountiful years, we want to emphasize, will never return. The huge sums of capital we currently manage eliminateanychance of exceptional performance. We will strive, however, for better-than-average results and feel it fair for you to hold us to that standard. Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road. To provide you a longer-term perspective on performance, we present on the facing page the yearly figures from page 2 recast into a series of five-year periods. Overall, there are 42 of these periods, and they tell an interesting story. On a comparative basis, our best years ended in the early 1980s. Themarket’sgolden period, however, came in the 17 following years, with Berkshire achieving stellar absolute returns even as our relative advantage narrowed. After 1999, the market stalled (or have you already noticed that?). Consequently, the satisfactory performance relative to the S&P that Berkshire has achieved since then has delivered only moderate absolute results. Looking forward, we hope to average several points better than the S&P – though that result is, of course, far from a sure thing. If we succeed in that aim, we will almost certainly produce better relative results in bad years for the stock market and suffer poorer results in strong markets. 4
Berkshire’s Corporate Performance vs. the S&P 500 by Five-Year Periods Annual Percentage Change Five-Year Period in Per-Share Book Value of Berkshire (1) in S&P 500 with Dividends Included (2) Relative Results (1)-(2) 1965-1969...............................................17.25.012.2 1966-1970...............................................14.73.910.8 1967-1971...............................................13.99.24.7 1968-1972...............................................16.87.59.3 1969-1973...............................................17.72.015.7 1970-1974...............................................15.0(2.4)17.4 1971-1975...............................................13.93.210.7 1972-1976...............................................20.84.915.9 1973-1977...............................................23.4(0.2)23.6 1974-1978...............................................24.44.320.1 1975-1979...............................................30.114.715.4 1976-1980...............................................33.413.919.5 1977-1981...............................................29.08.120.9 1978-1982...............................................29.914.115.8 1979-1983...............................................31.617.314.3 1980-1984...............................................27.014.812.2 1981-1985...............................................32.614.618.0 1982-1986...............................................31.519.811.7 1983-1987...............................................27.416.411.0 1984-1988...............................................25.015.29.8 1985-1989...............................................31.120.310.8 1986-1990...............................................22.913.19.8 1987-1991...............................................25.415.310.1 1988-1992...............................................25.615.89.8 1989-1993...............................................24.414.59.9 1990-1994...............................................18.68.79.9 1991-1995...............................................25.616.59.1 1992-1996...............................................24.215.29.0 1993-1997...............................................26.920.26.7 1994-1998...............................................33.724.09.7 1995-1999...............................................30.428.51.9 1996-2000...............................................22.918.34.6 1997-2001...............................................14.810.74.1 1998-2002............................................... 10.4(0.6)11.0 1999-2003............................................... 6 .0(0.6)6.6 2000-2004...............................................8.0(2.3)10.3 2001-2005...............................................8.00.67.4 2002-2006...............................................13.16.26.9 2003-2007...............................................13.312.80.5 2004-2008...............................................6.9(2.2)9.1 2005-2009...............................................8.60.48.2 2006-2010...............................................10.02.37.7 Notes:The first two periods cover the five years