Berkshire Hathaway 2002 Annual Report Download - page 73

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12. We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising
business value. Our guideline is to tell you the business facts that we would want to know if our positions
were reversed. We owe you no less. Moreover, as a company with a major communications business, it
would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when
reporting on ourselves than we would expect our news people to apply when reporting on others. We also
believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead
himself in private.
At Berkshire you will find no "big bath" accounting maneuvers or restructurings nor any "smoothing" of
quarterly or annual results. We will always tell you how many strokes we have taken on each hole and
never play around with the scorecard. When the numbers are a very rough "guesstimate," as they
necessarily must be in insurance reserving, we will try to be both consistent and conservative in our
approach.
We will be communicating with you in several ways. Through the annual report, I try to give all
shareholders as much value-defining information as can be conveyed in a document kept to reasonable
length. We also try to convey a liberal quantity of condensed but important information in our quarterly
reports, though I don't write those (one recital a year is enough). Still another important occasion for
communication is our Annual Meeting, at which Charlie and I are delighted to spend five hours or more
answering questions about Berkshire. But there is one way we can't communicate: on a one-on-one basis.
That isn't feasible given Berkshire's many thousands of owners.
In all of our communications, we try to make sure that no single shareholder gets an edge: We do not
follow the usual practice of giving earnings "guidance" or other information of value to analysts or large
shareholders. Our goal is to have all of our owners updated at the same time.
13. Despite our policy of candor, we will discuss our activities in marketable securities only to the extent
legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as
good product or business acquisition ideas are. Therefore we normally will not talk about our investment
ideas. This ban extends even to securities we have sold (because we may purchase them again) and to
stocks we are incorrectly rumored to be buying. If we deny those reports but say "no comment" on other
occasions, the no-comments become confirmation.
Though we continue to be unwilling to talk about specific stocks, we freely discuss our business and
investment philosophy. I benefitted enormously from the intellectual generosity of Ben Graham, the
greatest teacher in the history of finance, and I believe it appropriate to pass along what I learned from him,
even if that creates new and able investment competitors for Berkshire just as Ben's teachings did for him.
AN ADDED PRINCIPLE
To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his
period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company
during that holding period. For this to come about, the relationship between the intrinsic value and the market price
of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would
rather see Berkshire's stock price at a fair level than a high level. Obviously, Charlie and I can't control Berkshire's
price. But by our policies and communications, we can encourage informed, rational behavior by owners that, in
turn, will tend to produce a stock price that is also rational. Our it's-as-bad-to-be-overvalued-as-to-be-undervalued
approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of
attracting long-term investors who seek to profit from the progress of the company rather than from the investment
mistakes of their partners.
INTRINSIC VALUE
Now let's focus on a term that I mentioned earlier and that you will encounter in future annual reports.
Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative
attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that
can be taken out of a business during its remaining life.