INSUBCONTINENT EXCLUSIVE:
To the Shareholders of Berkshire Hathaway Inc Berkshire earned $4.0 billion in 2018 utilizing generally accepted accounting principles
The components of that figure are $24.8 billion in operating earnings, a $3.0 billion non-cash loss from an impairment of intangible assets
(arising almost entirely from our equity interest in Kraft Heinz), $2.8 billion in realized capital gains from the sale of investment
securities and a $20.6 billion loss from a reduction in the amount of unrealized capital gains that existed in our investment holdings
A new GAAP rule requires us to include that last item in earnings
In the first and fourth quarters, we reported GAAP losses of $1.1 billion and $25.4 billion respectively
In the second and third quarters, we reported profits of $12 billion and $18.5 billion
In complete contrast to these gyrations, the many businesses that Berkshire owns delivered consistent and satisfactory operating earnings in
For the year, those earnings exceeded their 2016 high of $17.6 billion by 41%
Wide swings in our quarterly GAAP earnings will inevitably continue
fluctuations of $2 billion or more, all of which the new rule says must be dropped immediately to our bottom line
Our advice Focus on operating earnings, paying little attention to gains or losses of any variety
My saying that in no way diminishes the importance of our investments to Berkshire
Over time, Charlie and I expect them to deliver substantial gains, albeit with highly irregular timing
Long-time readers of our annual reports will have spotted the different way in which I opened this letter
Three circumstances have made that so
First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides
Charlie and I expect that reshaping to continue in an irregular manner
Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be
included in book value at an amount far below their current value, a mismark that has grown in recent years
prices above book value but below our estimate of intrinsic value
The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down
That combination causes the book-value scorecard to become increasingly out of touch with economic reality
Markets can be extremely capricious: Just look at the 54-year history laid out on page 2
It concerns the management changes we made in early 2018, when Ajit Jain was put in charge of all insurance activities and Greg Abel was
given authority over all other operations
Berkshire is now far better managed than when I alone was supervising operations
Ajit and Greg have rare talents, and Berkshire blood flows through their veins
Analysis of that type can be mind-numbing, given that we own a vast array of specimens, ranging from twigs to redwoods
A few of our trees are diseased and unlikely to be around a decade from now
Many others, though, are destined to grow in size and beauty
Four of those groves are differentiated clusters of businesses and financial assets that are easy to understand
Before we look more closely at the first four groves, let me remind you of our prime goal in the deployment of your capital: to buy
ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics
We also need to make these purchases at sensible prices
Sometimes we can buy control of companies that meet our tests
Far more often, we find the attributes we seek in publicly-traded businesses, in which we normally acquire a 5% to 10% interest
Our two-pronged approach to huge-scale capital allocation is rare in corporate America and, at times, gives us an important advantage
In recent years, the sensible course for us to follow has been clear: Many stocks have offered far more for our money than we could obtain
by purchasing businesses in their entirety
That disparity led us to buy about $43 billion of marketable equities last year, while selling only $19 billion
Charlie and I believe the companies in which we invested offered excellent value, far exceeding that available in takeover transactions
businesses that Berkshire controls (usually with 100% ownership and never with less than 80%)
Those subsidiaries earned $16.8 billion last year
cash or stock-based), restructuring expenses, depreciation, amortization and home-office overhead
That brand of earnings is a far cry from that frequently touted by Wall Street bankers and corporate CEOs
have always borne the costs of doing so
Charlie and I do contend that our acquisition-related amortization expenses of $1.4 billion (detailed on page K-84) are not a true economic
In fact, we need to spend more than this sum annually to simply remain competitive in our many operations
Overall, Berkshire invested a record $14.5 billion last year in plant, equipment and other fixed assets, with 89% of that spent in America
As noted earlier, our equity investments were worth nearly $173 billion at yearend, an amount far above their cost
If the portfolio had been sold at its yearend valuation, federal income tax of about $14.7 billion would have been payable on the gain
In all likelihood, we will hold most of these stocks for a long time
not allow us to include the retained earnings of investees in our financial accounts
But those earnings are of enormous value to us: Over the years, earnings retained by our investees (viewed as a group) have eventually
delivered capital gains to Berkshire that totaled more than one dollar for each dollar these companies reinvested for us
All of our major holdings enjoy excellent economics, and most use a portion of their retained earnings to repurchase their shares
Meanwhile, our ownership increased from 12.6% to 17.9% because of repurchases made by the company
In our fourth grove, Berkshire held $112 billion at yearend in U.S
Treasury bills and other cash equivalents, and another $20 billion in miscellaneous fixed-income instruments
We consider a portion of that stash to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard
against external calamities
We have also promised to avoid any activities that could threaten our maintaining that buffer
Berkshire will forever remain a financial fortress
In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to
At times, our stock will tumble as investors flee from equities
But I will never risk getting caught short of cash
In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own
The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects
That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities
We continue, nevertheless, to hope for an elephant-sized acquisition
(Just writing about the possibility of a huge purchase has caused my pulse rate to soar.) My expectation of more stock purchases is not a
Charlie and I have no idea as to how stocks will behave next week or next year
Predictions of that sort have never been a part of our activities
Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price
appropriate amount for taxes eventually payable on the sale of marketable securities
You may ask whether an allowance should not also be made for the major tax costs Berkshire would incur if we were to sell certain of our
Forget that thought: It would be foolish for us to sell any of our wonderful companies even if no tax would be payable on its sale
Truly good businesses are exceptionally hard to find
Selling any you are lucky enough to own makes no sense at all
exceptional insurance companies
We will explain the characteristics of float later in this letter
This arrangement allows us to seamlessly and objectively allocate major amounts of capital, eliminate enterprise risk, avoid insularity,
fund assets at exceptionally low cost, occasionally take advantage of tax efficiencies, and minimize overhead
6 Repurchases and Reporting Earlier I mentioned that Berkshire will from time to time be repurchasing its own stock
those shareholders leaving the company and those who stay
True, the upside from repurchases is very slight for those who are leaving
Nevertheless, there is some benefit to sellers in having an extra buyer in the market
continuing shareholders reap an increase in per-share intrinsic value with every repurchase by the company
Obviously, repurchases should be price-sensitive: Blindly buying an overpriced stock is valuedestructive, a fact lost on many promotional
intelligent estimate of value
Providing that information is what Charlie and I try to do in this report
We do not want a partner to sell shares back to the company because he or she has been misled or inadequately informed
Some sellers, however, may disagree with our calculation of value and others may have found investments that they consider more attractive
Some of that second group will be right: There are unquestionably many stocks that will deliver far greater gains than ours
Charlie and I have no current interest in joining that group
Perhaps we will become big spenders in our old age
For 54 years our managerial decisions at Berkshire have been made from the viewpoint of the shareholders who are staying, not those who are
Consequently, Charlie and I have never focused on current-quarter results
Berkshire, in fact, may be the only company in the Fortune 500 that does not prepare monthly earnings reports or balance sheets
I, of course, regularly view the monthly financial reports of most subsidiaries
Furthermore, Berkshire has no company-wide budget (though many of our subsidiaries find one useful)
Shunning the use of this bogey sends an important message to our many managers, reinforcing the culture we prize
Over the years, Charlie and I have seen all sorts of bad corporate behavior, both accounting and operational, induced by the desire of
management to meet Wall Street expectations
At Berkshire, our audience is neither analysts nor commentators: Charlie and I are working for our shareholder-partners
The numbers that flow up to us will be the ones we send on to you
Viewed as a group, these businesses earned pre-tax income in 2018 of $20.8 billion, a 24% increase over 2017
Acquisitions we made in 2018 delivered only a trivial amount of that gain.
I will stick with pre-tax figures in this discussion
became effective at the beginning of that year
For 54 years, Charlie and I have loved our jobs
Daily, we do what we find interesting, working with people we like and trust
company is in good shape for whatever the future brings.
Warren E
Buffett
Chairman of the Board
