Berkshire Hathaway 2008 Annual Report Download - page 94

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 the quarterly reports we post on the internet, 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.
TWO ADDED PRINCIPLES
14. 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.
15. We regularly compare the gain in Berkshire’s per-share book value to the performance of the S&P 500. Over time, we hope to
outpace this yardstick. Otherwise, why do our investors need us? The measurement, however, has certain shortcomings that are
described in the next section. Moreover, it now is less meaningful on a year-to-year basis than was formerly the case. That is
because our equity holdings, whose value tends to move with the S&P 500, are a far smaller portion of our net worth than they
were in earlier years. Additionally, gains in the S&P stocks are counted in full in calculating that index, whereas gains in
Berkshire’s equity holdings are counted at 65% because of the federal tax we incur. We, therefore, expect to outperform the S&P
in lackluster years for the stock market and underperform when the market has a strong year.
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.
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a
precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are
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