Our Not-So-Secret Weapon
Occasionally,
markets and/or the economy will cause stocks and bonds of some large and
fundamentally good businesses to be strikingly mispriced. Indeed, markets can -
and will - unpredictably seize up or even vanish as
they did for four months in 1914 and for a few days in 2001. If you believe
that American investors are now more stable than in the past, think back to
September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we
have come a long way since smoke signals. Such instant panics won't happen
often - but they will happen.
Berkshire's
ability to immediately respond to market seizures with both huge sums and
certainty of performance may offer us
an occasional large-scale opportunity. Though the stock market is massively
larger than it was in our early years, today's active participants
are neither more emotionally stable nor better taught than when I was in
school. For whatever reasons, markets now exhibit far more casino-like behavior
than they did when I was young. The casino now resides in many homes and daily
tempts the occupants.
One fact of
financial life should never be forgotten. Wall Street - to use the term in its
figurative sense - would like its
customers to make money, but what truly causes its denizens' juices to flow is
feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed - not by everyone but
always by someone.
Occasionally,
the scene turns ugly. The politicians then become enraged; the most flagrant
perpetrators of misdeeds slip away, rich and unpunished; and your friend next
door becomes bewildered, poorer and sometimes vengeful. Money, he learns, has
trumped morality.
One
investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to
the American tailwind and the power of compound interest, the arena in which we
operate has been - and will be - rewarding if you make
a couple of good decisions during a lifetime and avoid
serious mistakes.
I believe
Berkshire can handle financial disasters
of a magnitude beyond any heretofore experienced. This ability is one we will
not relinquish. When economic upsets occur, as they will, Berkshire's goal will
be to function as an asset to the
country - just as it was in a very minor way in 2008-9 - and to help extinguish the financial fire rather than to be
among the many companies that, inadvertently or otherwise, ignited the
conflagration.
Our goal is
realistic. Berkshire's strength comes from its Niagara of diverse earnings
delivered after interest costs, taxes
and substantial charges for depreciation and amortization ("EBITDA"
is a banned measurement at Berkshire). We also operate with minimal
requirements for cash, even if the country encounters a prolonged period of
global economic weakness, fear and near-paralysis.
Berkshire
does not currently pay dividends, and its share repurchases are 100%
discretionary. Annual debt maturities are never material.
Your
company also holds a cash and U.S. Treasury bill position far in excess of what
conventional wisdom deems necessary. During the 2008 panic, Berkshire generated cash from operations and did not rely in
any manner on commercial paper, bank lines or debt markets. We did not predict the time of an economic paralysis but
we were always prepared for one.
Extreme
fiscal conservatism is a corporate pledge we make to those who have joined us
in ownership of Berkshire. In most years - indeed in most decades - our caution
will likely prove to be unneeded behavior - akin to an insurance policy on a
fortress-like building thought to
be fireproof. But Berkshire does not want to inflict permanent financial damage - quotational shrinkage
for extended periods can't be avoided - on Bertie or any of the individuals who have trusted us with
their savings.
Berkshire
is built to last.
