Berkshire Hathaway 2011 Annual Report Download - page 98

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 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.
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