Berkshire Hathaway 2003 Annual Report Download - page 4

3
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2003 was $13.6 billion, which increased the per-share book value of
both our Class A and Class B stock by 21%. Over the last 39 years (that is, since present management took
over) per-share book value has grown from $19 to $50,498, a rate of 22.2% compounded annually.*
It’ s per-share intrinsic value that counts, however, not book value. Here, the news is good:
Between 1964 and 2003, Berkshire morphed from a struggling northern textile business whose intrinsic
value was less than book into a widely diversified enterprise worth far more than book. Our 39-year gain
in intrinsic value has therefore somewhat exceeded our 22.2% gain in book. (For a better understanding of
intrinsic value and the economic principles that guide Charlie Munger, my partner and Berkshire’ s vice-
chairman, and me in running Berkshire, please read our Owner’ s Manual, beginning on page 69.)
Despite their shortcomings, book value calculations are useful at Berkshire as a slightly
understated gauge for measuring the long-term rate of increase in our intrinsic value. The calculation is
less relevant, however, than it once was in rating any single year’ s performance versus the S&P 500 index
(a comparison we display on the facing page). Our equity holdings, including convertible preferreds, have
fallen considerably as a percentage of our net worth, from an average of 114% in the 1980s, for example, to
an average of 50% in 2000-03. Therefore, yearly movements in the stock market now affect a much
smaller portion of our net worth than was once the case.
Nonetheless, Berkshire’ s long-term performance versus the S&P remains all-important. Our
shareholders can buy the S&P through an index fund at very low cost. Unless we achieve gains in per-
share intrinsic value in the future that outdo the S&P’ s performance, Charlie and I will be adding nothing to
what you can accomplish on your own.
If we fail, we will have no excuses. Charlie and I operate in an ideal environment. To begin with,
we are supported by an incredible group of men and women who run our operating units. If there were a
Corporate Cooperstown, its roster would surely include many of our CEOs. Any shortfall in Berkshire’ s
results will not be caused by our managers.
Additionally, we enjoy a rare sort of managerial freedom. Most companies are saddled with
institutional constraints. A company’ s history, for example, may commit it to an industry that now offers
limited opportunity. A more common problem is a shareholder constituency that pressures its manager to
dance to Wall Street’ s tune. Many CEOs resist, but others give in and adopt operating and capital-
allocation policies far different from those they would choose if left to themselves.
At Berkshire, neither history nor the demands of owners impede intelligent decision-making.
When Charlie and I make mistakes, they are – in tennis parlance – unforced errors.
*All figures used in this report apply to Berkshire’ s A shares, the successor to the only stock that
the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of
the A.