Date: Thu, 18 Dec 1997 10:36:05 GMT Server: Apache/1.0.5 Content-type: text/html Content-length: 40131 Last-modified: Tue, 19 Aug 1997 13:06:24 GMT Berkshire Hathaway Owners Manual


                          BERKSHIRE HATHAWAY INC.

                             AN OWNER'S MANUAL

            A Message from Warren E. Buffett, Chairman and CEO

                                                                 June, 1996
          

INTRODUCTION

     Berkshire's recent offering of Class B stock added more than 25,000
shareholders to our rolls.  Charlie Munger, Berkshire's Vice Chairman and
my partner, and I welcome each of you.  As a further greeting, we have
prepared this booklet to help you understand our business, goals,
philosophy and limitations.
     These pages are aimed at explaining our broad principles of operation,
not at giving you detail about Berkshire's many businesses.  For more
detail and a continuing update on our progress, you should look to our
annual reports.  We will be happy to send a copy of our 1995 report to any
shareholder requesting it.  In addition, we can also supply you with a
compendium of our 1977-95 annual letters.


OWNER-RELATED BUSINESS PRINCIPLES

     Berkshire's shareholder count has grown from about 1,200 in the late
1960's to an estimated 70,000 today, with two big spurts contributing
heavily to the increase.  One jump occurred with the just-completed
offering of the Class B shares, and the other took place in 1983, when Blue
Chip Stamps merged into Berkshire.
     At the time of that merger, I set down 13 owner-related business
principles that I thought would help new shareholders understand our
managerial approach.  As is appropriate for "principles," all 13 remain alive
and well today, and they are stated here in italics.  A few words have been
changed to bring them up-to-date and to each I've added a short
commentary.

     1.   Although our form is corporate, our attitude is partnership.  Charlie
          Munger and I think of our shareholders as owner-partners, and of
          ourselves as managing partners.  (Because of the size of our
          shareholdings we are also, for better or worse, controlling partners.) 
          We do not view the company itself as the ultimate owner of our
          business assets but instead view the company as a conduit through
          which our shareholders own the assets.

          Charlie and I hope that you do not think of yourself as merely
          owning a piece of paper whose price wiggles around daily and that
          is a candidate for sale when some economic or political event
          makes you nervous.  We hope you instead visualize yourself as a
          part owner of a business that you expect to stay with indefinitely,
          much as you might if you owned a farm or apartment house in
          partnership with members of your family.  For our part, we do not
          view Berkshire shareholders as faceless members of an ever-
          shifting crowd, but rather as co-venturers who have entrusted their
          funds to us for what may well turn out to be the remainder of their
          lives.

          The evidence suggests that most Berkshire shareholders have
          indeed embraced this long-term partnership concept.  The annual
          percentage turnover in Berkshire's shares is a small fraction of that
          occurring in the stocks of other major American corporations, even
          when the shares I own are excluded from the calculation.
          In effect, our shareholders behave in respect to their Berkshire
          stock much as Berkshire itself behaves in respect to companies in
          which it has an investment.  As owners of, say, Coca-Cola or
          Gillette shares, we think of Berkshire as being a non-managing
          partner in two extraordinary businesses, in which we measure our
          success by the long-term progress of the companies rather than by
          the month-to-month movements of their stocks.  In fact, we would
          not care in the least if several years went by in which there was no
          trading, or quotation of prices, in the stocks of those companies. 
          If we have good long-term expectations, short-term price changes
          are meaningless for us except to the extent they offer us an
          opportunity to increase our ownership at an attractive price.


     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 about
          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 1995, in fact, we made three 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 business we already own   at attractive prices. 
          And third, some of those same wonderful businesses, such as
          Coca-Cola and Wells Fargo, 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.


     5.   Because of our two-pronged approach to business ownership and
          because of the limitations of conventional accounting, consolidated
          reported earnings may reveal relatively little about our true
          economic performance.  Charlie and I, both as owners and
          managers, virtually ignore such consolidated numbers.  However,
          we will also report to you the earnings of each major business we
          control, numbers we consider of great importance.  These figures,
          along with other information we will supply about the individual
          businesses, should generally aid you in making judgments about
          them.

          To state things simply, we try to give you in the annual report the
          numbers and other information that really matter.  Charlie and I pay
          a great deal of attention to how well our businesses are doing, and
          we also work to understand the environment in which each
          business is operating.  For example, is one of our businesses
          enjoying an industry tailwind or is it facing a headwind?  Charlie
          and I need to know exactly which situation prevails and to adjust
          our expectations accordingly.  We will also pass along our
          conclusions to you.

          Over time, practically all of our businesses have exceeded our
          expectations.  But occasionally we have disappointments, and we
          will try to be as candid in informing you about those as we are in
          describing the happier experiences.  When we use unconventional
          measures to chart our progress   for instance, you will be reading
          in our annual reports about insurance "float"   we will try to explain
          these concepts and why we regard them as important.  In other
          words, we believe in telling you how we think so that you can
          evaluate not only Berkshire's businesses but also assess our
          approach to management and capital allocation.


     6.   Accounting consequences do not influence our operating or capital-
          allocation decisions.  When acquisition costs are similar, we much
          prefer to purchase $2 of earnings that is not reportable by us under
          standard accounting principles than to purchase $1 of earnings that
          is reportable.  This is precisely the choice that often faces us since
          entire businesses (whose earnings will be fully reportable)
          frequently sell for double the pro-rata price of small portions (whose
          earnings will be largely unreportable).  In aggregate and over time,
          we expect the unreported earnings to be fully reflected in our
          intrinsic business value through capital gains.

          We attempt to offset the shortcomings of conventional accounting
          by regularly reporting "look-through" earnings (though, for special
          and nonrecurring reasons, we omitted these from the 1995 Annual
          Report).  The look-through numbers include Berkshire's own
          reported operating earnings, excluding capital gains and purchase-
          accounting adjustments (an explanation of which occurs later in this
          message) plus Berkshire's share of the undistributed earnings of
          our major investees   amounts that are not included in Berkshire's
          figures under conventional accounting.  From these undistributed
          earnings of our investees we subtract the tax we would have owed
          had the earnings been paid to us as dividends.  We also exclude
          capital gains, purchase-accounting adjustments and extraordinary
          charges or credits from the investee numbers.

          We have found over time that the undistributed earnings of our
          investees, in aggregate, have been as fully as beneficial to
          Berkshire as if they had been distributed to us (and therefore had
          been included in the earnings we officially report).  This pleasant
          result has occurred because most of our investees are engaged in
          truly outstanding businesses that can often employ incremental
          capital to great advantage, either by putting it to work in their
          businesses or by repurchasing their shares.  Obviously, every
          capital decision that our investees have made has not benefitted us
          as shareholders, but overall we have garnered far more than a
          dollar of value for each dollar they have retained.  We consequently
          regard look-through earnings as realistically portraying our yearly
          gain from operations.

          In 1992, our look-through earnings were $604 million, and in that
          same year we set a goal of raising them by an average of 15% per
          annum to $1.8 billion in the year 2000.  Since that time, however,
          we have issued additional shares   including the B Shares sold
          recently   so that we now need look-through earnings of $1.9
          billion in 2000 to match the per-share goal we originally were
          shooting for.  This is a tough target but one we still hope to hit.


     7.   We use debt sparingly and, when we do borrow, we attempt to
          structure our loans on a long-term fixed-rate basis.  We will reject
          interesting opportunities rather than over-leverage our balance
          sheet.  This conservatism has penalized our results but it is the
          only behavior that leaves us comfortable, considering our fiduciary
          obligations to policyholders, lenders and the many equity holders
          who have committed unusually large portions of their net worth to
          our care.  (As one of the Indianapolis "500" winners said:  "To finish
          first, you must first finish.")

          The financial calculus that Charlie and I employ would never permit
          our trading a good night's sleep for a shot at a few extra
          percentage points of return.  I've never believed in risking what my
          family and friends have and need in order to pursue what they don't
          have and don't need.

          Besides, Berkshire has access to two low-cost, non-perilous
          sources of leverage that allow us to safely own far more assets
          than our equity capital alone would permit:  deferred taxes and
          "float," the funds of others that our insurance business holds
          because it receives premiums before needing to pay out losses. 
          Both of these funding sources have grown rapidly and now total
          about $12 billion.

          Better yet, this funding to date has been cost-free.  Deferred tax
          liabilities bear no interest.  And as long as we can break even in
          our insurance underwriting   which we have done, on the average,
          during our 29 years in the business   the cost of the float
          developed from that operation is zero.  Neither item, of course, is
          equity; these are real liabilities.  But they are liabilities without
          covenants or due dates attached to them.  In effect, they give us
          the benefit of debt   an ability to have more assets working for us
          but saddle us with none of its drawbacks.

          Of course, there is no guarantee that we can obtain our float in the
          future at no cost.  But we feel our chances of attaining that goal are
          as good as those of anyone in the insurance business.  Not only
          have we reached the goal in the past (despite a number of
          important mistakes by your Chairman), but have now, with our
          acquisition of GEICO, materially improved our prospects for getting
          there in the future.


     8.   A managerial "wish list" will not be filled at shareholder expense. 
          We will not diversify by purchasing entire businesses at control
          prices that ignore long-term economic consequences to our
          shareholders. We will only do with your money what we would do
          with our own, weighing fully the values you can obtain by
          diversifying your own portfolios through direct purchases in the
          stock market.

          Charlie and I are interested only in acquisitions that we believe will
          raise the per-share intrinsic value of Berkshire's stock.  The size of
          our paychecks or our offices will never be related to the size of
          Berkshire's balance sheet. 


     9.   We feel noble intentions should be checked periodically against
          results.  We test the wisdom of retaining earnings by assessing
          whether retention, over time, delivers shareholders at least $1 of
          market value for each $1 retained.  To date, this test has been met. 
          We will continue to apply it on a five-year rolling basis.  As our net
          worth grows, it is more difficult to use retained earnings wisely.
          We continue to pass the test, but the challenges of doing so have
          grown more difficult.  If we reach the point that we can't create
          extra value by retaining earnings, we will pay them out and let our
          shareholders deploy the funds.


    10.   We will issue common stock only when we receive as much in
          business value as we give.  This rule applies to all forms of
          issuance   not only mergers or public stock offerings, but stock-for-
          debt swaps, stock options, and convertible securities as well.  We
          will not sell small portions of your company   and that is what the
          issuance of shares amounts to   on a basis inconsistent with the
          value of the entire enterprise.

          When we sold the Class B shares, we stated that Berkshire stock
          was not undervalued   and some people found that shocking.  That
          reaction was not well-founded.  Shock should have registered
          instead had we issued shares when our stock was undervalued. 
          Managements that say or imply during a public offering that their
          stock is undervalued are usually being economical with the truth or
          uneconomical with their existing shareholders' money:  Owners
          unfairly lose if their managers deliberately sell assets for 80› that
          in fact are worth $1.  We didn't commit that kind of crime in our
          recent offering and we never will.


    11.   You should be fully aware of one attitude Charlie and I share that
          hurts our financial performance:  Regardless of price, we have no
          interest at all in selling any good businesses that Berkshire owns. 
          We are also very reluctant to sell sub-par businesses as long as we
          expect them to generate at least some cash and as long as we feel
          good about their managers and labor relations.  We hope not to
          repeat the capital-allocation mistakes that led us into such sub-par
          businesses.  And we react with great caution to suggestions that
          our poor businesses can be restored to satisfactory profitability by
          major capital expenditures.  (The projections will be dazzling and
          the advocates sincere, but, in the end, major additional investment
          in a terrible industry usually is about as rewarding as struggling in
          quicksand.)  Nevertheless, gin rummy managerial behavior (discard
          your least promising business at each turn) is not our style.  We
          would rather have our overall results penalized a bit than engage
          in that kind of behavior.

          We continue to avoid gin rummy behavior.  True, we closed our
          textile business in the mid-1980's after 20 years of struggling with
          it, but only because we felt it was doomed to run never-ending
          operating losses.  We have not, however, given thought to selling
          operations that would command very fancy prices nor have we
          dumped our laggards, though we focus hard on curing the problems
          that cause them to lag.


    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 two terms that I mentioned earlier and that you will
encounter in future annual reports.

     Let's start with intrinsic value, 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 revised.  Two people
looking at the same set of facts, moreover   and this would apply even to
Charlie and me   will almost inevitably come up with at least slightly
different intrinsic value figures.  That is one reason we never give you our
estimates of intrinsic value.  What our annual reports do supply, though,
are the facts that we ourselves use to calculate this value.

     Meanwhile, we regularly report our per-share book value, an easily
calculable number, though one of limited use.  The limitations do not arise
from our holdings of marketable securities, which are carried on our books
at their current prices.  Rather the inadequacies of book value have to do
with the companies we control, whose values as stated on our books may
be far different from their intrinsic values.

     The disparity can go in either direction.  For example, in 1964 we could
state with certitude that Berkshire's per-share book value was $19.46. 
However, that figure considerably overstated the company's intrinsic value,
since all of the company's resources were tied up in a sub-profitable textile
business.  Our textile assets had neither going-concern nor liquidation
values equal to their carrying values.  Today, however, Berkshire's situation
is reversed:  Our March 31, 1996 book value of $15,180 far understates
Berkshire's intrinsic value, a point true because many of the businesses we
control are worth much more than their carrying value.

     Inadequate though they are in telling the story, we give you Berkshire's
book-value figures because they today serve as a rough, albeit significantly
understated, tracking measure for Berkshire's intrinsic value.  In other
words, the percentage change in book value in any given year is likely to
be reasonably close to that year's change in intrinsic value.

     You can gain some insight into the differences between book value and
intrinsic value by looking at one form of investment, a college education. 
Think of the education's cost as its "book value."  If this cost is to be
accurate, it should include the earnings that were foregone by the student
because he chose college rather than a job.

     For this exercise, we will ignore the important non-economic benefits
of an education and focus strictly on its economic value.  First, we must
estimate the earnings that the graduate will receive over his lifetime and
subtract from that figure an estimate of what he would have earned had he
lacked his education.  That gives us an excess earnings figure, which must
then be discounted, at an appropriate interest rate, back to graduation day. 
The dollar result equals the intrinsic economic value of the education.

     Some graduates will find that the book value of their education exceeds
its intrinsic value, which means that whoever paid for the education didn't
get his money's worth.  In other cases, the intrinsic value of an education
will far exceed its book value, a result that proves capital was wisely
deployed.  In all cases, what is clear is that book value is meaningless as
an indicator of intrinsic value.


PURCHASE-ACCOUNTING ADJUSTMENTS

     Next: spinach time.  I know that a discussion of accounting
technicalities turns off many readers, so let me assure you that a full and
happy life can still be yours if you decide to skip this section.

     Our recent acquisition of GEICO, however, means that purchase-
accounting adjustments of about $60 million will now be charged against
our annual earnings as recorded under generally accepted accounting
principles (GAAP) and we may well make other acquisitions that will
increase this figure in the future.  So this is a subject of importance to
Berkshire.  In our annual reports, also, we will sometimes talk of earnings
that we will describe as "before purchase-accounting adjustments."  The
discussion that follows will tell you why we think earnings of that
description have far more economic meaning than the earnings produced
by GAAP.

     When Berkshire buys a business for a premium over the GAAP net
worth of the acquiree   as will usually be the case, since most companies
we'd want to buy don't come at a discount   that premium has to be
entered on the asset side of our balance sheet.  There are loads of rules
about just how a company should record the premium.  But to simplify this
discussion, we will focus on "Goodwill," the asset item to which almost all
of Berkshire's acquisition premiums have been allocated.  For example,
when we recently acquired the half of GEICO we didn't previously own, we
recorded goodwill of about $1.6 billion.

     GAAP requires goodwill to be amortized   that is, written off   over a
period no longer than 40 years.  Therefore, to extinguish our $1.6 billion in
GEICO goodwill, we will annually take charges of about $40 million against
our earnings.  This amount is not deductible for tax purposes, so it reduces
both our pre-tax and after-tax earnings by $40 million.

     In an accounting sense, consequently, our GEICO goodwill will
disappear gradually in even-sized bites.  But the one thing I can guarantee
you is that the economic goodwill we have purchased at GEICO will not
decline in the same measured way.  In fact, my best guess is that the
economic goodwill assignable to GEICO will not decline at all, but rather
will increase   quite probably in a very substantial way.

     I made a similar statement in our 1983 Annual Report about the
goodwill attributed to See's Candy, when I used that company as an
example in a discussion of goodwill accounting.  At that time, our balance
sheet carried about $36 million of See's goodwill.  We have since been
charging about $1 million against earnings every year in order to amortize
the asset, and the See's goodwill on our balance sheet is now down to
about $23 million.  In other words, from an accounting standpoint, See's is
now presented as having lost a good deal of goodwill since 1983.

     The economic facts could not be more different.  In 1983, See's earned
about $27 million pre-tax on $11 million of net operating assets; in 1995 it
earned $50 million on $5 million of net operating assets.  Clearly See's
economic goodwill has increased dramatically  during the interval rather
than decreased.  Just as clearly, See's is worth many hundreds of millions
of dollars more than its stated value on our books.

     We could, of course, be wrong, but we expect GEICO's gradual loss of
accounting value to be paired with increases in its economic value. 
Certainly that has been the pattern at most of our subsidiaries, not just
See's.  That is why we regularly present our operating earnings in a way
that allows you to ignore all purchase-accounting adjustments.

     In the future, also, we will adopt a similar policy for look-through
earnings, moving to a form of presentation that rids these earnings of the
major purchase-accounting adjustments of investees.  We will not apply
this policy to companies that have only small amounts of goodwill on their
books, such as Coca-Cola or Gillette.  We will extend it, however, to Wells
Fargo and Disney, which have both recently made huge acquisitions and
are consequently dealing with exceptionally large goodwill charges.

     Before leaving this subject, we should issue an important warning: 
Investors are often led astray by CEOs and Wall Street analysts who
equate depreciation charges with the amortization charges we have just
discussed.  In no way are the two the same:  With rare exceptions,
depreciation is an economic cost every bit as real as wages, materials, or
taxes.  Certainly that is true at Berkshire and at virtually all the other
businesses we have studied.  Furthermore, we do not think so-called
EBITDA (earnings before interest, taxes, depreciation and amortization) is
a meaningful measure of performance.  Managements that dismiss the
importance of depreciation   and emphasize "cash flow" or EBITDA   are
apt to make faulty decisions, and you should keep that in mind as you
make your own investment decisions.


THE MANAGING OF BERKSHIRE

     I think it's appropriate that I conclude with a discussion of Berkshire's
management, today and in the future.  As our first owner-related principle
tells you, Charlie and I are the managing partners of Berkshire.  But we
subcontract all of the heavy lifting in this business to the managers of our
subsidiaries.  In fact, we delegate almost to the point of abdication: 
Though Berkshire has about 33,000 employees, only 12 of these are at
headquarters.

     Charlie and I mainly attend to capital allocation and the care and
feeding of our key managers.  Most of these managers are happiest when
they are left alone to run their businesses, and that is customarily just how
we leave them.  That puts them in charge of all operating decisions and of
dispatching the excess cash they generate to headquarters.  By sending
it to us, they don't get diverted by the various enticements that would come
their way were they responsible for deploying the cash their businesses
throw off.  Furthermore, Charlie and I are exposed to a much wider range
of possibilities for investing these funds than any of our managers could
find in his or her own industry.

     Most of our managers are independently wealthy, and it's therefore up
to us to create a climate that encourages them to choose working with
Berkshire over golfing or fishing.  This leaves us needing to treat them
fairly and in the manner that we would wish to be treated if our positions
were reversed.

     As for the allocation of capital, that's an activity both Charlie and I enjoy
and in which we have acquired some useful experience.  In a general
sense, grey hair doesn't hurt on this playing field:  You don't need good
hand-eye coordination or well-toned muscles to push money around (thank
heavens).  As long as our minds continue to function effectively, Charlie
and I can keep on doing our jobs pretty much as we have in the past.

     On my death, Berkshire's ownership picture will change but not in a
disruptive way:  First, only about 1% of my stock will have to be sold to
take care of bequests and taxes; second, the balance of my stock will go
to my wife, Susan, if she survives me, or to a family foundation if she
doesn't.  In either event, Berkshire will possess a controlling shareholder
guided by the same philosophy and objectives that now set our course.

     At that juncture, the Buffett family will not be involved in managing the
business, only in picking and overseeing the managers who do.  Just who
those managers will be, of course, depends on the date of my death.  But
I can anticipate what the management structure will be:  Essentially my job
will be split into two parts, with one executive becoming responsible for
investments and another for operations.  If the acquisition of new
businesses is in prospect, the two will cooperate in making the decisions
needed.  Both executives will report to a board of directors that will be
responsive to the controlling shareholder, whose interests will in turn be
aligned with yours.

     Were we to need the management structure I have just described on
an immediate basis, my family and a few key individuals know who I would
pick to fill both posts.  Both currently work for Berkshire and are people in
whom I have total confidence.

     I will continue to keep my family posted on the succession issue.  Since
Berkshire stock will make up virtually my entire estate and will account for
a similar portion of the assets of either my wife or the foundation for a
considerable period after my death, you can be sure that I have thought
through the succession question carefully.  You can be equally sure that
the principles we have employed to date in running Berkshire will continue
to guide the managers who succeed me.

     Lest we end on a morbid note, I also want to assure you that I have
never felt better.  I love running Berkshire, and if enjoying life promotes
longevity, Methuselah's record is in jeopardy.