Berkshire Hathaway 2002 Annual Report Download - page 70

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2. In line with Berkshire's owner-orientation, most of our directors have a major portion of their net worth
invested in the company. We eat our own cooking.
Charlie's family has 90% or more of its net worth in Berkshire shares; my wife, Susie, and I have more
than 99%. In addition, many of my relatives — my sisters and cousins, for example — keep a huge portion
of their net worth in Berkshire stock.
Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a
wide variety of truly extraordinary businesses. Indeed, we believe that Berkshire is close to being unique in
the quality and diversity of the businesses in which it owns either a controlling interest or a minority
interest of significance.
Charlie and I cannot promise you results. But we can guarantee that your financial fortunes will move in
lockstep with ours for whatever period of time you elect to be our partner. We have no interest in large
salaries or options or other means of gaining an "edge" over you. We want to make money only when our
partners do and in exactly the same proportion. Moreover, when I do something dumb, I want you to be
able to derive some solace from the fact that my financial suffering is proportional to yours.
3. Our long-term economic goal (subject to some qualifications mentioned later) is to maximize Berkshire's
average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the
economic significance or performance of Berkshire by its size; we measure by per-share progress. We are
certain that the rate of per-share progress will diminish in the future — a greatly enlarged capital base
will see to that. But we will be disappointed if our rate does not exceed that of the average large American
corporation.
Since that was written at yearend 1983, our intrinsic value (a topic I'll discuss a bit later) has increased at
an annual rate of more than 25%, a pace that has definitely surprised both Charlie and me. Nevertheless the
principle just stated remains valid: Operating with large amounts of capital as we do today, we cannot
come close to performing as well as we once did with much smaller sums. The best rate of gain in intrinsic
value we can even hope for is an average of 15% per annum, and we may well fall far short of that target.
Indeed, we think very few large businesses have a chance of compounding intrinsic value at 15% per
annum over an extended period of time. So it may be that we will end up meeting our stated goal — being
above average — with gains that fall significantly short of 15%.
4. Our preference would be to reach our goal by directly owning a diversified group of businesses that
generate cash and consistently earn above-average returns on capital. Our second choice is to own parts
of similar businesses, attained primarily through purchases of marketable common stocks by our insurance
subsidiaries. The price and availability of businesses and the need for insurance capital determine any
given year's capital allocation.
As has usually been the case, it is easier today to buy small pieces of outstanding businesses via the stock
market than to buy similar businesses in their entirety on a negotiated basis. Nevertheless, we continue to
prefer the 100% purchase, and in some years we get lucky: In the last three years in fact, we made seven
acquisitions. Though there will be dry years also, we expect to make a number of acquisitions in the
decades to come, and our hope is that they will be large. If these purchases approach the quality of those
we have made in the past, Berkshire will be well served.
The challenge for us is to generate ideas as rapidly as we generate cash. In this respect, a depressed stock
market is likely to present us with significant advantages. For one thing, it tends to reduce the prices at
which entire companies become available for purchase. Second, a depressed market makes it easier for our
insurance companies to buy small pieces of wonderful businesses — including additional pieces of
businesses we already own — at attractive prices. And third, some of those same wonderful businesses,
such as Coca-Cola, are consistent buyers of their own shares, which means that they, and we, gain from the
cheaper prices at which they can buy.
Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular
purchaser of food benefits from declining food prices. So when the market plummets — as it will from
time to time — neither panic nor mourn. It's good news for Berkshire.