Letters from Warren Buffet to stockholders 1981.docx

Letters from Warren Buffet to stockholders 1981.docx

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LettersfromWarrenBuffettostockholders1981

BERKSHIREHATHAWAYINC.

February26,1982

TotheShareholdersofBerkshireHathawayInc.:

Operatingearningsof$39.7millionin1981amountedto

15.2%ofbeginningequitycapital（valuingsecuritiesatcost）

comparedto17.8%in1980.Ournewplanthatallowsstockholders

todesignatecorporatecharitablecontributions（detailedlater）

reducedearningsbyabout$900,000in1981.Thisprogram,which

weexpecttocontinuesubjecttoannualevaluationofour

corporatetaxposition,hadnotbeeninitiatedin1980.

Non-ControlledOwnershipEarnings

Inthe1980annualreportwediscussedextensivelythe

conceptofnon-controlledownershipearnings,i.e.,Berkshire�s

shareoftheundistributedearningsofcompanieswedon�tcontrol

orsignificantlyinfluencebutinwhichwe,nevertheless,have

importantinvestments.（Wewillbegladtomakeavailabletonew

orprospectiveshareholderscopiesofthatdiscussionorothers

fromearlierreportstowhichwereferinthisreport.）No

portionofthoseundistributedearningsisincludedinthe

operatingearningsofBerkshire.

However,ourbeliefisthat,inaggregate,those

undistributedand,therefore,unrecordedearningswillbe

translatedintotangiblevalueforBerkshireshareholdersjustas

surelyasifsubsidiarieswecontrolhadearned,retained-and

reported-similarearnings.

Weknowthatthistranslationofnon-controlledownership

earningsintocorrespondingrealizedandunrealizedcapitalgains

forBerkshirewillbeextremelyirregularastotimeof

occurrence.Whilemarketvaluestrackbusinessvaluesquitewell

overlongperiods,inanygivenyeartherelationshipcangyrate

capriciously.Marketrecognitionofretainedearningsalsowill

beunevenlyrealizedamongcompanies.Itwillbedisappointingly

lowornegativeincaseswhereearningsareemployednon-

productively,andfargreaterthandollar-for-dollarofretained

earningsincasesofcompaniesthatachievehighreturnswith

theiraugmentedcapital.Overall,ifagroupofnon-controlled

companiesisselectedwithreasonableskill,thegroupresult

shouldbequitesatisfactory.

Inaggregate,ournon-controlledbusinessinterestshave

morefavorableunderlyingeconomiccharacteristicsthanour

controlledbusinesses.That�sunderstandable;theareaofchoice

hasbeenfarwider.Smallportionsofexceptionallygood

businessesareusuallyavailableinthesecuritiesmarketsat

reasonableprices.Butsuchbusinessesareavailablefor

purchaseintheirentiretyonlyrarely,andthenalmostalwaysat

highprices.

GeneralAcquisitionBehavior

Asourhistoryindicates,wearecomfortablebothwithtotal

ownershipofbusinessesandwithmarketablesecurities

representingsmallportionsofbusinesses.Wecontinuallylook

forwaystoemploylargesumsineacharea.（Butwetrytoavoid

smallcommitments-�Ifsomething�snotworthdoingatall,it�s

notworthdoingwell�.）Indeed,theliquidityrequirementsofour

insuranceandtradingstampbusinessesmandatemajorinvestments

inmarketablesecurities.

Ouracquisitiondecisionswillbeaimedatmaximizingreal

economicbenefits,notatmaximizingeithermanagerialdomainor

reportednumbersforaccountingpurposes.（Inthelongrun,

managementsstressingaccountingappearanceovereconomic

substanceusuallyachievelittleofeither.）

Regardlessoftheimpactuponimmediatelyreportable

earnings,wewouldratherbuy10%ofWonderfulBusinessTatX

persharethan100%ofTat2Xpershare.Mostcorporate

managerspreferjustthereverse,andhavenoshortageofstated

rationalesfortheirbehavior.

However,wesuspectthreemotivations-usuallyunspoken-

tobe,singlyorincombination,theimportantonesinmosthigh-

premiumtakeovers:

（1）Leaders,businessorotherwise,seldomaredeficientin

animalspiritsandoftenrelishincreasedactivityand

challenge.AtBerkshire,thecorporatepulsenever

beatsfasterthanwhenanacquisitionisinprospect.

（2）Mostorganizations,businessorotherwise,measure

themselves,aremeasuredbyothers,andcompensatetheir

managersfarmorebytheyardstickofsizethanbyany

otheryardstick.（AskaFortune500managerwherehis

corporationstandsonthatfamouslistand,invariably,

thenumberrespondedwillbefromthelistrankedby

sizeofsales;hemaywellnotevenknowwherehis

corporationplacesonthelistFortunejustas

faithfullycompilesrankingthesame500corporationsby

profitability.）

（3）Manymanagementsapparentlywereoverexposedin

impressionablechildhoodyearstothestoryinwhichthe

imprisonedhandsomeprinceisreleasedfromatoad�s

bodybyakissfromabeautifulprincess.Consequently,

theyarecertaintheirmanagerialkisswilldowonders

fortheprofitabilityofCompanyT（arget）.

Suchoptimismisessential.Absentthatrosyview,

whyelseshouldtheshareholdersofCompanyA（cquisitor）

wanttoownaninterestinTatthe2Xtakeovercost

ratherthanattheXmarketpricetheywouldpayifthey

madedirectpurchasesontheirown?

Inotherwords,investorscanalwaysbuytoadsatthe

goingpricefortoads.Ifinvestorsinsteadbankroll

princesseswhowishtopaydoublefortherighttokiss

thetoad,thosekisseshadbetterpacksomereal

dynamite.We�veobservedmanykissesbutveryfew

miracles.Nevertheless,manymanagerialprincesses

remainserenelyconfidentaboutthefuturepotencyof

theirkisses-evenaftertheircorporatebackyardsare

knee-deepinunresponsivetoads.

Infairness,weshouldacknowledgethatsomeacquisition

recordshavebeendazzling.Twomajorcategoriesstandout.

Thefirstinvolvescompaniesthat,throughdesignor

accident,havepurchasedonlybusinessesthatareparticularly

welladaptedtoaninflationaryenvironment.Suchfavored

businessmusthavetwocharacteristics:

（1）anabilityto

increasepricesrathereasily（evenwhenproductdemandisflat

andcapacityisnotfullyutilized）withoutfearofsignificant

lossofeithermarketshareorunitvolume,and

（2）anabilityto

accommodatelargedollarvolumeincreasesinbusiness（often

producedmorebyinflationthanbyrealgrowth）withonlyminor

additionalinvestmentofcapital.Managersofordinaryability,

focusingsolelyonacquisitionpossibilitiesmeetingthesetests,

haveachievedexcellentresultsinrecentdecades.However,very

fewenterprisespossessbothcharacteristics,andcompetitionto

buythosethatdohasnowbecomefiercetothepointofbeing

self-defeating.

Thesecondcategoryinvolvesthemanagerialsuperstars-men

whocanrecognizethatrareprincewhoisdisguisedasatoad,

andwhohavemanagerialabilitiesthatenablethemtopeelaway

thedisguise.WesalutesuchmanagersasBenHeinemanat

NorthwestIndustries,HenrySingletonatTeledyne,ErwinZabanat

NationalServiceIndustries,andespeciallyTomMurphyatCapital

CitiesCommunications（arealmanagerial�twofer�,whose

acquisitioneffortshavebeenproperlyfocusedinCategory1and

whoseoperatingtalentsalsomakehimaleaderofCategory2）.

Frombothdirectandvicariousexperience,werecognizethe

difficultyandrarityoftheseexecutives�achievements.（Sodo

they;thesechampshavemadeveryfewdealsinrecentyears,and

oftenhavefoundrepurchaseoftheirownsharestobethemost

sensibleemploymentofcorporatecapital.）

YourChairman,unfortunately,doesnotqualifyforCategory

2.And,despiteareasonablygoodunderstandingoftheeconomic

factorscompellingconcentrationinCategory1,ouractual

acquisitionactivityinthatcategoryhasbeensporadicand

inadequate.Ourpreachingwasbetterthanourperformance.（We

neglectedtheNoahprinciple:

predictingraindoesn�tcount,

buildingarksdoes.）

Wehavetriedoccasionallytobuytoadsatbargainprices

withresultsthathavebeenchronicledinpastreports.Clearly

ourkissesfellflat.Wehavedonewellwithacoupleofprinces

-buttheywereprinceswhenpurchased.Atleastourkisses

didn�tturnthemintotoads.And,finally,wehaveoccasionally

beenquitesuccessfulinpurchasingfractionalinterestsin

easily-identifiableprincesattoad-likeprices.

BerkshireAcquisitionObjectives

Wewillcontinuetoseektheacquisitionofbusinessesin

theirentiretyatpricesthatwillmakesense,evenshouldthe

futureoftheacquiredenterprisedevelopmuchalongthelinesof

itspast.Wemayverywellpayafairlyfancypricefora

Category1businessifwearereasonablyconfidentofwhatweare

getting.Butwewillnotnormallypayalotinanypurchasefor

whatwearesupposedtobringtotheparty-forwefindthatwe

ordinarilydon�tbringalot.

During1981wecamequiteclosetoamajorpurchase

involvingbothabusinessandamanagerwelikedverymuch.

However,thepricefinallydemanded,consideringalternativeuses

forthefundsinvolved,wouldhaveleftourownersworseoffthan

beforethepurchase.Theempirewouldhavebeenlarger,butthe

citizenrywouldhavebeenpoorer.

Althoughwehadnosuccessin1981,fromtimetotimeinthe

futurewewillbeabletopurchase100%ofbusinessesmeetingour

standards.Additionally,weexpectanoccasionalofferingofa

major�non-votingpartnership�asdiscussedunderthePinkerton�s

headingonpage47ofthisreport.Wewelcomesuggestions

regardingsuchcompanieswherewe,asasubstantialjunior

partner,canachievegoodeconomicresultswhilefurtheringthe

long-termobjectivesofpresentownersandmanagers.

Currently,wefindvaluesmosteasilyobtainedthroughthe

open-