Today Berkshire possesses:
(1) an unmatched collection of businesses, most of them now enjoying favorable economic prospects;
(2) a cadre of outstanding managers who, with few exceptions, are unusually devoted to both the subsidiary they operate and to Berkshire;
(3) an extraordinary diversity of earnings, premier financial strength and oceans of liquidity that we will maintain under all circumstances;
(4) a first-choice ranking among many owners and managers who are contemplating sale of their businesses and
(5) in a point related to the preceding item, a culture, distinctive in many ways from that of most large companies, that we have worked 50 years to develop and that is now rock-solid.
These strengths provide us a wonderful foundation on which to build.
The Next 50 Years at Berkshire
Now let’s take a look at the road ahead. Bear in mind that if I had attempted 50 years ago to gauge what was coming, certain of my predictions would have been far off the mark. With that warning, I will tell you what I would say to my family today if they asked me about Berkshire’s future.
‹ First and definitely foremost, I believe that the chance of permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments. That’s because our per-share intrinsic business value is almost certain to advance over time.
This cheery prediction comes, however, with an important caution:
- If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit.
- In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.
Purchases of Berkshire that investors make at a price modestly above the level at which the company would repurchase its shares, however, should produce gains within a reasonable period of time.
- Berkshire’s directors will only authorize repurchases at a price they believe to be well below intrinsic value.
- (In our view, that is an essential criterion for repurchases that is often ignored by other managements.)
For those investors who plan to sell within a year or two after their purchase, I can offer no assurances,whatever the entry price.
- Movements of the general stock market during such abbreviated periods will likely be far more important in determining your results than the concomitant change in the intrinsic value of your Berkshire shares.
- As Ben Graham said many decades ago: “In the short-term the market is a voting machine; in the long-run it acts as a weighing machine.” Occasionally, the voting decisions of investors – amateurs and professionals alike – border on lunacy.
- Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years.
- Those who seek short-term profits should look elsewhere.
Another warning: Berkshire shares should not be purchased with borrowed money.
- There have been three times since 1965 when our stock has fallen about 50% from its high point.
- Someday, something close to this kind of drop will happen again, and no one knows when.
- Berkshire will almost certainly be a satisfactory holding for investors. But it could well be a disastrous choice for speculators employing leverage.
‹ I believe the chance of any event causing Berkshire to experience financial problems is essentially zero.
- We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets to the unprepared.
- Berkshire played an important role as a “first responder” during the 2008-2009 meltdown, and we have since more than doubled the strength of our balance sheet and our earnings potential.
- Your company is the Gibraltar of American business and will remain so.
Financial staying power requires a company to maintain three strengths under all circumstances:
(1) a large and reliable stream of earnings;
(2) massive liquid assets and
(3) no significant near-term cash requirements.
Ignoring that last necessity is what usually leads companies to experience unexpected problems:
- Too often, CEOs of profitable companies feel they will always be able to refund maturing obligations, however large these are.
- In 2008-2009, many managements learned how perilous that mindset can be.
Here’s how we will always stand on the three essentials.
1. First, our earnings stream is huge and comes from a vast array of businesses.
- Our shareholders now own many large companies that have durable competitive advantages, and we will acquire more of those in the future.
- Our diversification assures Berkshire’s continued profitability, even if a catastrophe causes insurance losses that far exceed any previously experienced.
- At a healthy business, cash is sometimes thought of as something to be minimized – as an unproductive asset that acts as a drag on such markers as return on equity.
- Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.
- American business provided a case study of that in 2008. In September of that year, many long-prosperous companies suddenly wondered whether their checks would bounce in the days ahead. Overnight, their financial oxygen disappeared.
- At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning late September and early October, we supplied $15.6 billion of fresh money to American businesses.
- We could do that because we always maintain at least $20 billion – and usually far more – in cash equivalents. And by that we mean U.S. Treasury bills, not other substitutes for cash that are claimed to deliver liquidity and actually do so, except when it is truly needed.
- When bills come due, only cash is legal tender. Don’t leave home without it.
3. Finally – getting to our third point – we will never engage in operating or investment practices that can result in sudden demands for large sums.
- That means we will not expose Berkshire to short-term debt maturities of size nor enter into derivative contracts or other business arrangements that could require large collateral calls.
- Some years ago, we became a party to certain derivative contracts that we believed were significantly mispriced and that had only minor collateral requirements. These have proved to be quite profitable.
- Recently, however, newly-written derivative contracts have required full collateralization. And that ended our interest in derivatives, regardless of what profit potential they might offer.
- We have not, for some years, written these contracts, except for a few needed for operational purposes at our utility businesses.
- Moreover, we will not write insurance contracts that give policyholders the right to cash out at their option. Many life insurance products contain redemption features that make them susceptible to a “run” in times of extreme panic.
- Contracts of that sort, however, do not exist in the property-casualty world that we inhabit. If our premium volume should shrink, our float would decline – but only at a very slow pace.
- The reason for our conservatism, which may impress some people as extreme, is that it is entirely predictable that people will occasionally panic, but not at all predictable when this will happen.
- Though practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension on December 6, 1941 or September 10, 2001.)
- And if you can’t predict what tomorrow will bring, you must be prepared for whatever it does.